Why use a time and materials (T&M) contract? The typical answer is that the owner knows the scope of work, but does not have all the details and doesn’t want to wait to start. Another reason may be cost. The owner thinks the job is not that complicated so the cost of a full set of drawings and specifications is not needed.

When the contract contains a nonbinding preliminary cost estimate, keep in mind that the owner is strongly influenced by it. The estimate suggests to the owner what the range of the final cost is—what the owner is willing and possibly able to pay.

You may see a T&M contract as eliminating the risk of estimating errors and avoiding paperwork for changes and time extensions. If that is your perspective, it is not fully true. Let’s examine how to use a T&M contract and how to protect yourself from losing money when you have one.

Payment schedule

Depending on the job, your invoices may fluctuate between weeks. Unlike a fixed-price agreement where you have scheduling control, the timing of T&M jobs can be heavily affected by the owner’s changing needs.

 Consider the following three items for your written T&M contract:

•  Biweekly billings and payments
•  A clause in your contract giving you the right to suspend work if payment is late
•  Attach your billing form to the contract

Labor units

Standard T&M contracts require listing employees’ hourly rates, including overhead and profit. You may also mark up their rates for small tools and expendables. It is worth adding rates for involved employees who are not on-site, such as designers, drafters and project managers. Some electrical contractors list hourly rates by individuals to account for their different pay scales.

Materials

A benefit to a T&M contract is the essentially automatic adjustment for material price escalations. Usually, unit rates for materials are not included in the contract because the owner’s design is incomplete and a full list of materials is not possible. However, you may want to add a note to your contract about materials sold in minimum quantities so you can charge for purchasing cost when you use fewer of those materials.

Equipment

This item, surprisingly, is not mentioned in most standard T&M contracts. You should list the equipment you may use.

The rental rate for equipment should have a footnote if there is a minimum period. For equipment you own, you may use a commercial rate or the billing rates you normally use, but remember to list equipment operators under labor.

Changes/design completion

Many contractors on T&M jobs do not keep track of additions and changes because they expect to be paid for all work done. While that thinking may be superficially accurate, it can lead to disputes. It is a good idea to keep the owner notified in writing where new or expanded work is being required. Speed memos and emails are useful.

Many T&M contracts have a changes clause, which can be ambiguous. What exactly is a change versus filling in the gaps of incomplete design? You should notify the owner when unexpected conditions increase your job cost, although the changed condition may or may not be a “change” under the contract.

Time/delays

Time is always important to an owner. You need to keep an eye on events slowing your progress and send notes to the owner when they occur. These may include their design decisions, delivery of owner-supplied materials and weather. It is better to stay ahead with these notices than to have to explain later why the job is taking so long. Where appropriate, ask for time extensions.

Owners’ challenge to T&M invoices

The most common complaint I have heard from ECs about T&M jobs is that owners often dispute the amount of hours reported in each invoice. Owners complain that the number of hours spent does not match up to the amount of completed work. They think the crews were inefficient. What can you do about this type of complaint?

Stay ahead of the issue. One of my clients, a contractor from Alabama, submits summary reports on a weekly basis on what work was done and what difficulties/events were encountered. If you find an interfering condition buried in the walls, or other subcontractors are disrupting your work, note these problems in your summary reports.

Agreeing to negotiate a T&M bill, especially early in the job, sets a bad precedent. A right in the contract to stop work for nonpayment can help resolve payment problems.

T&M contracts must be based on mutual respect and trust. These ideals are supported by good record-keeping and regular, informative communications with the owner. 

stock.adobe.com / Viktoria Kurpas