Construction 101: Time & Materials Tags

RhumbixMay 20, 2021 • 6 min read

A time and materials tag, or T&M tag, is an industry-standard document used by contractors to authorize and document work spent on a particular task, typically performed outside the current contract scope. An everyday use case is where the general contractor (GC) enables their subcontractor to work by documenting their labor, material, and equipment on a particular task using a paper time and materials tag.

The GC’s construction manager or superintendent approves the submitted work, verifying the work description and quantities are accurate. Unlike change order requests, time & materials tags keep track of quantities while leaving price adjustments made by the GC’s project manager.

Generally, the project manager will oversee the project contract and track costs. On the jobsite, field crews cannot approve or submit costs. This means Time and Material Tags are necessary for documenting work performed and including quantities without attaching associated expenses.

The Time & Materials Tag process is designed to both support and protect GCs and Subcontractors:

  • Subcontractors are protected from performing uncompensated work outside the contract and issue formal documentation to perform this type of work.
  • General Contractors protect themselves from jobsite cost approvals for work that may already be included in the contract.

Common types of time & material tag documents

While time & materials tag is the most common term, various other names by contractors can represent this form of out-of-scope construction documentation. Here is a typical list of names that subcontractors use for T&M Tags:

  1. Work order (extra)
  2. Change order request form
  3. Daily planning and report form
  4. Extra work authorization
  5. Daily extra work report
  6. Service order
  7. Time & materials tag
  8. Fieldwork order/authorization
  9. Order for additional work
  10. Additional work authorization field report
  11. Time & Materials extra work
  12. Force account report

Regardless of what your construction company calls these documents, the goal is always the same: document out-of-contract work performed onsite.

When are time & materials contracts used?

The AIA asserts the purpose of a construction contract is to:

  • Define stakeholder responsibilities
  • Assign stakeholder financial and legal obligations
  • Act as a foundational document for establishing project goals during all phases of planning, implementation, and collaboration

Time & Materials (T&M) contracts are used in construction when the project’s scope isn’t predetermined, making it difficult to agree on a fixed price and timeline for the contract. Instead, Time & materials contracts allow for the flexibility of an “as-we-go” agreement.

Time & materials construction contracts bring a high risk for subcontractors. As with many other construction contracts, the pros and cons may depend on your needs and operational workflow.

Types of construction contracts

Fixed Price

  • The owner and contractor agree to a lump sum price. The contractor develops an estimate of the labor and materials for construction costs based on the design and schedule. The contractor’s profitability rests on executing the job based on the estimate. Fixed price contracts typically take longer to start because the design and plan must be completed to provide an accurate estimate that turns into an approved budget.

Time & Materials Construction Contracts

  • The project owner agrees to pay the contractor for the cost of labor, materials, overhead, and profit. In some cases, this is also referred to as a “cost-plus” contract.

In many cases, a time & materials construction contract appeals to the project owner because it offers complete transparency into the project’s costs. The owner can verify the accuracy of timesheets and invoices. Disputes into the costs, such as how much items cost, are mitigated. Contractors also benefit from the immediacy of their work and thus revenue recognition. Although the contractor is guaranteed to recover any expenses, there is a limit to the project’s profit.

Items included in construction contracts

  • Labor Rates–By laborer category, individual rate, or a single fixed rate to cover all laborers. Actual labor rates and added costs should be reflected. Fully burdened labor rates include taxes, insurance, and employee benefits.
  • Material Markup–Retail pricing on materials. However, the contractor has established wholesale pricing with the supplier and charges an additional material markup.
  • Not to Exceed–A max amount on the project to avoid overcharges is established by the project owner for their protection. Not exceeding stipulations provides the contractor an incentive to work efficiently to stay within the contract’s limits.

Additional risks relating to time & materials construction contract

  • Increased risk to both companies
  • Owner proceeding without a plan/estimate at project start can quickly make costs rise
  • Delays in completing the project until the owner secures additional funding
  • The contractor is at risk and liable for any costs the owner cannot pay

Time & materials contracts seem reasonable enough: the owner pays for costs. However, disputes do arise if the owner is unfamiliar with construction and where specific tasks or particular items are not approved. For example, owners may question contractors’ nice to haves vs. necessities for safety, and so forth.

Contractors can also be placed at a disadvantage with time & material contracts over profit. As agreed by the project owner, the profit is fixed and predetermined on a time & materials contract. The “plus” in a “cost-plus” contract is designed to cover fixed costs in the contract adequately. Any errors in that calculation can mean reduced profit margins and losses. Fixed profits on projects with time & materials contracts also stunt strong financial growth, which may not be ideal for ambitious contractors looking to scale their firms.

Accurately documented correspondence is required to reduce any questions on payment. The contractor must account for all operating expenses, including costs for overhead.

It’s critical that contractors independently track time & materials even though the project owner is making the payments on invoices. Tracking labor hours and material usage on specific tasks and projects will provide the contractor with reliable historical information. This can provide insightful data to deliver more robust project estimates and set more reasonable expectations on costs for future time & materials contracts. When your accuracy improves, it may be time to move into the world of fixed contracts.

Why are time & material tags important?

Time & material tags are crucial tools to keep construction projects moving and on schedule. When there is any uncertainty on whether work is out-of-contract or in-contract, T&M tags help eliminate the back-and-forth arguments that could take days or weeks to resolve. This means project crews can continue working rather than holding up project schedules during the negotiation. The jobsite teams will document quantities of labor, material, and equipment, and the back office team determines the status of the work performed.

Additionally, joint agreements help define work to be tracked on a T&M basis ahead of time. In that case, it can save substantial upfront administrative time and impact delays in creating, submitting, awaiting approvals from Change Orders before work begins.

Typical situations for using a time & materials tag

Time & materials tags can be used for many things. While they are often unique to individual contractors and each construction project, some of the more common use cases include:

  • Overtime hours
  • Paint touch-ups
  • Trade damages
  • Additional cleaning
  • Re-staking
  • Concrete sack and patching
  • Drywall patching
  • Owner/architect-directed changes
  • Unforeseen conditions

These situations are routine changes on nearly every construction contract, but there is a tendency to dislike Time & Materials Tags. To learn more about effectively navigating construction Time & Materials Tracking, check out How Time & Materials Tracking Can Make or Break Your Project.