Bidding activity in construction increased by 36% in January 2021 (Autodesk + Dodge Data & Analytics). That’s excellent news for the industry and can open up significant opportunities for your business. Understanding how to win bids and remain competitive sets yourself up for success and is no simple task. In situations where timelines and scope aren’t predetermined, you may consider using a time and material contract, which is a good way to ensure all your costs are covered when estimating a project.
However, it’s important to understand the risks and limitations of estimating with a time and materials contract, when to use this type of contract, how to avoid problems with this method, and tools to help accurately track costs.
A contract must align with your operating procedure, meet the job requirements, cover your expenses and overheads, and turn a profit. Without an agreement that covers all those bases, you’re putting your business at risk.
The two types of construction contracts are:
- Fixed-Price model. You estimate the job and set a fixed price that’s agreed upon before work ever starts. There’s no changing this price once the contract has been signed.
- Time and material model. The client agrees to pay for the actual scope of work. This is based on both the hourly rate of labor and how many hours were worked, the cost of materials, and how many materials were used.
What should be covered in a time and material contract?
A few items need to be outlined in your time and material contract to avoid problems when it comes time to invoice:
- The fixed hourly rate for labor for everyone working on the job, including project administrators
- The markup on your materials, usually between 15%-35%
- Decide if you’ll abide by not-to-exceed (NTE) clauses on labor and materials costs and work them into the contract if needed and where appropriate
In addition to writing a contract that covers all your bases, you’ll also need to log everything that’s done on the worksite:
- Log hours for labor
- Log all the materials purchased and used
- Log sub-contractor hours and fees
- Keep records of all timecards, invoices, and any other documentation regarding the work performed
Accurately tracking all the expenses on the site will help you collect your payment if there should be a disagreement at the end of the project. If you have expenses that aren’t accounted for in writing, you may not be paid for them. Many contractors find it valuable to use digital tools for T&M tracking to allow the speed and accuracy of this important task.
5 times to use time and material contracts
These are five situations in which you’d be better off with a time and material contract than a fixed price model.
1. Unpredictable scenarios
Costs are predictable when you know the requirements, timeframes, and exact specifications of a job before the job has begun. However, if a client doesn’t have a clear vision of what they want, there’s no telling what the final product will involve.
Unpredictability can also be associated with timelines. If there’s no set timeline or timelines are likely to change, that needs to be accounted for.
When many project details are unknown as you’re working out a contract, then a time and materials contract is the right way to go. Otherwise, you risk losing your profit margin, or the job will cost you money.
2. When both parties can agree
Some customers don’t like to work with time and materials contracts. Knowing the price fits nicely into their budget and gives them peace of mind.
These contracts do pose a higher risk for the owner while securing your profit. Yet, when a client can’t define the scope of work, a time and materials contract ensures that your business can be profitable on the project.
Assure clients that costs for labor and materials will be worked out ahead of time. Consider working in not-to-exceed conditions and inform the client when you’re reaching those amounts. This way, you can come up with solutions together.
3. When there’s a need for flexibility
When working on a long-term project with dynamic requirements, a time and material contract gives you flexibility.
If timelines are going to change, you need the flexibility to account for longer work hours and overtime. If additions are going to be made or pieces of the project are discontinued, you need the flexibility to account for that in the final costs.
4. When you’re new to the industry
When you’re a new contractor, you may be unaware of hidden costs, expenses, and overhead that you need to cover. You may be unsure of how much to mark up materials or where to provide a discount for long-term projects.
When you lack a system for accurately estimating costs, you can’t provide an accurate quote. You also run the risk of inaccurately forecasting construction projects and what a project takes to complete.
This can lead to overestimating. You’ll be quoting more than others in the industry, and you’ll lose jobs.
It can also cause underestimation. If you underquote, you risk not being able to cover expenses and make a profit. People may hire you because you’ve quoted less, but you’ll lose money.
Using a time and materials contract can help you gain expertise in estimating. In the future, you have a better idea of what it takes to get a job done and make a profit.
5. When you understand and accept the risks
There is a risk associated with a time and materials contract. If you’re going to adopt this model, make sure you’re aware of these and accept the consequences.
- Make sure it’s legal. In some states, time and material contracts are prohibited.
- These contracts end in lawsuits more often than fixed-price contracts.
- You may be accused of not acting in good faith, which is breaking the law. This happens when costs exceed the estimated cost.
- It’s not uncommon for clients to run out of money to finish the job. This happens when they’ve made multiple changes that resulted in cost increases and ran out of money before the job is finished.
- When a client runs out of money, you may be accused of low-balling your estimate and expected to finish the job for what you’ve been paid.
- Clients may track employee productivity, including the hours of work and breaks taken. They may also not be willing to pay for mandated break times, and time is taken for necessary conversations with employees, inspectors, and other job site individuals.
Some of these items can be worked into a contract while others cannot. Be aware of the risks of a time and materials contract and ensure your client does not take advantage of your work.
Need a hand?
A time and material contract is appropriate in many construction situations. If you need a hand in managing your site accurately, contact us to find out how we can help.