If you work in construction, you’ve worked on a time and materials job. It’s just an easy way to do things, and basing the total price on the cost of materials plus the time spent working makes sense. But a time and materials contract isn’t always the best choice. So the question is: What are the pros and cons with using a time and materials contract?
Table of Contents
What is a Time and Materials Contract?
Before getting too far along, it’s probably worth laying out the basics of a time and materials contract — the benefits and drawbacks. After that, it should be more obvious when they should be used and when they shouldn’t.
At their core, time and materials contracts are simple: contractors will be reimbursed for the materials they purchase, and they will also be paid a rate for the time they’re working on the job. At the outset, it’s crucial to agree on what materials will be paid for and what hourly rates will apply.
With that in mind, here are some pros and cons of a time and materials contract:
- It’s easy to pivot if the specs change for the project. The time and materials required are still the basis of payments.
- Being able to handle delays or roadblocks with confidence. The simple price structure makes it simple how to approach extra time or resources required to complete work
- Negotiations are simple. It’s easy to set rules at the start of the job for what materials will be covered and what rates will be for the time put into the job. What’s more, it’s easy to set a cap on what can be sent and to plan accordingly.
- Tracking time and materials is a pain in the…butt. Keeping track of time and how much money is being allocated for specific materials can be a real drag on productivity.
- There’s no benefit for being efficient. If payment is being made based on time, then there’s little incentive to finish a job quickly. But, this can be worked around by including a bonus of some sort for coming in ahead of schedule.
- Fronting your own costs is an expensive endeavor, and it can be risky if disputes arise. Often, these jobs work on a reimbursement basis, so a contractor will purchase the necessary materials and bill the owner later. On paper, it’s a pretty good system! In practice, an owner might question whether some materials are necessary or if they’re being even being used on the job. This also ties into tracking materials like we discussed above.
Free Template Download: Time and Material Contract
When Does a Time And Materials Contract Make the Most Sense?
The answer is unpredictable. No, literally! Time and materials contracts make the most sense for jobs where the scope of work might change, or where it might be hard to predict how much time and materials will be required to get the job done. Otherwise, it doesn’t make much sense at all to enter into a contract where the timeframe and profits are up in the air.
When the scope of work is predictable, there’s no reason not to set an appropriate price and knock the job out as efficiently as possible. A time and materials contract can simplify paperwork on the front end. However, using this type of contract can require much more work on the back end.
What Other Contract Options are There?
Two options come to mind, but there are a number of ways to combine different principles and create an appropriate contract structure.
Fixed Price Contract
Fixed price contracts act pretty much as the polar opposite of time and materials contracts. As you probably could have guessed, a fixed price contract sets one price for the job. Fixed price contracts are desirable if the work can be done quickly and efficiently, i.e. doing a”20-hour job in 10 hours.” If a contractor can shave hours or days off of the total estimated time for a job, that money goes straight to the bottom line, and into the contractor’s pocket. The contractor’s margins improve, and the owner would benefit from the job being finished ahead of schedule. (The contractor would benefit too!)
Unit Price Contract
This is probably an oversimplification, but a unit price contract can sort of bridge the gap between a fixed price contract and a lump sum contract. Instead of one price for the entire job, tasks or different aspects of a job are broken up into “units” and priced accordingly. So, there is some predictability in cost and there is also flexibility since the entire job isn’t priced from the outset. When a project requires a series of tasks that can be easily divided into units, a unit price contract could be a good option.
Combining different contract types happens all the time – and it’s usually an informal process. Some parts of the project can be easily predicted and lump sum pricing can be used, while other parts of the job may be a little less predictable so those tasks might be paid on a time and materials basis. Plus, incentives can be thrown in for quick work and maximum prices can be set for the entire project or for individual tasks – the possibilities are endless.