According to a 2014 Survey of Construction conducted by the Census Bureau, the average multifamily building takes over 11 months to build.
Constructions of apartment buildings, commercial facilities, and even homes can take months to accomplish. When you’re working with a set plan and time frame, and you know your industry, it’s relatively easy to figure out how much you need to charge to turn a profit.
But what about in situations where timelines and scope aren’t predetermined? That’s when you may consider using a time and material contract.
A time and material contract is a good way to ensure all your costs are covered when estimating a project. But they come with some risks and limitations as well.
We’re going to tell you all about how they work and 5 instances when you can and should use one.
A contract has to align with your operating procedure, meet the requirements of the job, cover your expenses, and overheads, and turn a profit. Without a contract that covers all those bases, you’re putting your business at risk.
In terms of constructions contracts, contractors have 2 choices:
- 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 materials 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, as well as 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 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 clauses on labor and material 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 work site.
Log hours for labor, all the materials purchased and used, and sub-contractor hours and fees. You should also keep all time cards, invoices, and any other documentation regarding the work performed.
Accurately tracking of 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.
When 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
When you know the requirements, timeframes, and exact specifications of a job before the job has begun, the costs are predictable. 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 of the project details are TBA when you’re working out a contract, then a time and materials contract is the right way to go. Otherwise, you risk spending a lot more than you’re making.
When Both Parties Can Agree
Some customers don’t like to work with time and material 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. But when a client can’t define the scope of work, a time and materials contract ensures that your business can be successful.
Assure clients that costs for labour 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.
When There’s Need for Flexibility
When you’re working on a long-term project that has 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 to be able to account for that in the final costs.
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 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 underestimating. 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 material 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.
When You Know and Accept the Risks
There is risk associated with a time and material contract. If you’re going to adopt this model, make sure you’re aware of these and can 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 run 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 that’s 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 material contract and ensure you trust your client to 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.