When a T&M contract is signed, this means that the client agrees to compensate the company or contractor they are working with for the costs of the materials needed to complete the project at a predetermined hourly rate until project completion. T&M contracts can also include other fees and expenses associated with the provided services.
When Are T&M Contracts Used?
Time&Materials contracts are mostly used:
- For large-scale, longer projects in which a large portion of the funds goes towards acquiring materials (an example would be a construction project),
- When it’s hard to determine the scope of the project in advance (when a client cannot determine their preferences regarding project completion, the timeframe of completion, the overall cost, and the terms of the project).
In these cases, the client and the contractor organization flesh out the scope of the project together and put everything in writing. Usually, the client sets a maximum final price, and the contractor starts procuring materials and getting the project underway, taking into account this maximum budget stipulated by the T&M contract.
What Should a Time and Materials Contract Include?
In order for an organization or a contractor to bill a client bound by a T&M contract, they would have to keep accurate logs of project data and include:
- The fixed hourly rate for every team member working on the project, including the project admins.
- The usual markup on the materials that will be used, which can vary between 15% and 35% but not exclusively.
- The log hours for the labor.
- Logs for all the materials purchased and used for that project.
- The hours and fees for any sub-contractors if the need arises.
- Accurate records of time cards, timesheets, invoices, or any other type of documentation that displays data from project-related activities.
The Advantages of T&M Contracts
With a T&M contract, it’s easy to make changes mid-project. With a fixed-price contract, on the other hand, potential changes or scope creep can lead to the contractor exceeding the initial budget, which requires a lot of negotiation and amendments to the contract.
- Handling delays
T&M contracts enable contractors to handle any delays or project setbacks as their simple billing structure allows them to ask for more time or additional funds for materials to finish the project.
- Simple negotiations.
When under a T&M contract, it’s simple for contractors to set their rules for the materials they use and the billing rates for the time required to finish the project. They can also plan the project scope together with the client and lay out a ground plan before the work starts.
The Challenges of T&M Contracts
- Efficiency vs payment.
If the client pays at an hourly rate, then there is no need for the contractor to work faster or finish the project ahead of time, which can lead to contractors stalling to get paid more. The best way to combat this challenge is for the contractor and client to agree on a set bonus if the contractor manages to finish the project ahead of schedule.
- Fronting costs.
When under a T&M contract, contractors have to front their own costs before they can bill the clients to cover the expenses and turn a profit.
However, it can happen that the contractor miscalculates the work hours and materials needed or get pushback from the client. For example, a client might not be satisfied with the materials the contractor has procured or they can question whether they were actually used in the project.
In both scenarios, the contractor might end up in a situation where they are paying for project expenses out of pocket. The best way for the contractor to overcome this challenge and negotiate with the client successfully is transparent and diligent time and cost tracking.
- Tracking time and costs
Since these contracts regulate expenses for materials, different types of work, sub-contractors for special tasks, and more, accounting for expenses down to the last nut and bolt can be challenging for the contractor.
That’s why many contractors choose to track the comings and goings of their projects and employees under this type of contract by implementing digital time tracking and project management software to create accurate reports for their clients at billing time.
Using software designed for this purpose is much more efficient and ensures that the contractor can easily show the client exactly what they’re billed for.
The software can prove even more convenient if the project includes a lot of fieldwork, which is quite common for these types of contracts, as software can usually be downloaded on mobile devices for quick field entries.