What is the meaning of time and materials?

“Time and materials” refers to an agreement called a T&M contract. These contracts roughly outline project specifications, hourly rates, and the costs of the materials needed for the project. The contract can also include a not-to-exceed clause—an amount the project must not surpass.

When a business signs a T&M contract, they agree to compensate the contractor for the materials and pay an hourly rate until project completion.

When to use a T&M contract

Businesses often use Time and Materials contracts for:

• Longer projects that require a substantial amount of materials (e.g. construction projects)
• Understanding the project scope ahead of time (e.g., when the business doesn’t have a set idea of its project preferences, timeframe, overall cost, and terms)

In these cases, the business and the contractor set the project scope and put it in writing. The contractor will start gathering materials and start the project according to the business’s budget.

What should be included in a Time and Materials Contract?

To set expectations and ensure everyone understands the project parameters, the T&M contract should include:

• The fixed hourly rate for team members working on the project
• The markup on the materials
• A log of labor hours
• Logs for materials purchased and used
• The hours and fees for any sub-contractors
• Accurate records of time cards, timesheets, invoices, or other documentation for the project

Benefits of T&M Contracts

• Flexibility
  A T&M contract factors in changes mid-project, unlike a fixed-price contract, which requires renegotiation and amendments.
• Ease dealing with delays
  Contractors can handle any delays or setbacks due to a billing structure that makes room to add funds to finish the project.
• Straightforward negotiations
  Contractors can easily set billing rates for the time and materials needed to finish the project. They often also plan the project scope with the business and formulate a plan before starting the work.

Challenges of T&M Contracts

• Payment issues

When businesses pay an hourly rate, contractors may stall to get paid more. To get around this, the contractor and business can agree on a bonus if the contractor finishes the project ahead of schedule.

• Contractors pay upfront

Under a T&M contract, contractors use their own money to cover costs before they send a bill for their time and expenses. If the business refutes the materials, the contractor may end up paying for supplies out of pocket. Contractors can avoid this with transparent and diligent time and cost tracking.

• Tracking time and costs

T&M contracts track expenses for materials and work down to the last tool, which can be challenging for contractors. Digital time-tracking tools and payment software can generate accurate reports for billing.