The reality: with material costs rising 5-50% in 2026 and labor markets tight, how you structure your T&M contract directly determines whether you make money or lose it. A 20% material cost increase can wipe out 50-70% of your profit margin if your contract isn’t built to handle it.
This guide covers how to structure T&M deals that actually protect your profits—from calculating loaded labor rates to the contract clauses that prevent billing disputes.
What is a T&M Contract?
A T&M contract (Time and Materials contract) is an agreement where the client pays for actual labor hours worked plus materials used, with markup for overhead and profit. Unlike fixed-price contracts that lock in total cost upfront, T&M billing adjusts based on what actually happens during the project.
The key distinction: T&M shifts financial risk from contractor to owner. You’re reimbursed for actual costs throughout the project. If unforeseen conditions emerge, you bill for additional work rather than absorbing losses.
This protection is valuable, but only if your contract is structured correctly. Get the details wrong, and you’ll find your margins squeezed despite the theoretical protection T&M provides.
The Two Components: Time and Materials
Every T&M contract has two billing elements, and both need careful structuring:
Time (Labor)
You bill for hours worked at predetermined rates. But these aren’t just wage rates—they must be fully loaded rates that include:
- Base wages
- Payroll taxes (Social Security, Medicare, unemployment)
- Workers’ compensation insurance
- Health insurance and benefits
- General overhead allocation
- Profit margin
Materials
You bill actual material costs plus a markup percentage. The markup covers:
- Time spent ordering and picking up materials
- Freight and delivery charges
- Storage and handling
- Returns coordination
- Overhead and profit
Industry standard markup ranges from 15% to 35%. Where you land in that range depends on project complexity, material handling requirements, and your overhead structure.
Calculating Loaded Labor Rates
Your labor rate is where T&M profitability starts. Get this wrong, and you’re losing money on every hour billed—regardless of how well you track time.
The Formula
Loaded Rate = Base Wage + Labor Burden + Overhead Allocation + Profit
Example Calculation
For a carpenter earning $30/hour base wage:
- Base wage: $30.00
- Labor burden (30%): $9.00
- Overhead allocation: $12.00
- Profit (15%): $7.65
- Loaded billing rate: $58.65 (typically rounded to $60)
Your contract should specify different rates for each labor category:
- General laborer: $45-55/hour
- Carpenter: $65-80/hour
- Licensed electrician: $85-100/hour
- Project supervisor: $80-95/hour
Critical: Don’t forget to include rates for involved employees who are not on-site, such as designers, drafters, and project managers. If you don’t list them, you can’t bill for them.
Setting Material Markup
Material markup isn’t just profit—it covers real costs that erode margins if not accounted for.
What Markup Must Cover
- Time spent researching, ordering, and coordinating deliveries
- Pickup trips when delivery isn’t available
- On-site storage and staging
- Returns processing and restocking coordination
- Freight, taxes, and handling fees
- Overhead and profit
Typical Markup Ranges
- 15-20%: Simple materials with easy handling
- 20-30%: Standard construction materials
- 30-35%: Specialty items requiring extra coordination
2026 Market Reality
With material costs rising 5-50% across key categories—steel, lumber, concrete, copper—your T&M contract protects you from price volatility that would devastate fixed-price margins. But only if your markup is set correctly from the start.
One contractor locked in $200,000 in steel in December 2025. By March 2026, prices jumped 28%. Their T&M structure meant they billed materials at current cost plus markup—protecting margins while passing actual costs to the owner as agreed.
Essential Contract Clauses for Profit Protection
The structure of your T&M contract determines whether you make or lose money. These clauses are non-negotiable:
1. Labor Rate Schedule
List loaded hourly rates for every labor category you might use. Be comprehensive—if a role isn’t listed, you can’t bill for it.
2. Material Cost and Markup
Clearly define:
- What’s included in “material cost” (purchase price, tax, freight)
- The markup percentage applied
- Documentation required (receipts, invoices)
3. Not-to-Exceed (NTE) Clause
Owners often want cost caps. The NTE clause sets a maximum, but protect yourself: include language that adjusts the cap when scope changes. Without this, scope additions eat into your profit while the cap stays fixed.
4. Scope of Work
Even with T&M flexibility, define the general nature of work. This prevents disputes about what’s covered and what constitutes additional work.
5. Change Order Procedures
Establish how additional work gets approved. Written authorization before work begins protects against “I never agreed to that” disputes.
6. Payment Terms
Define billing frequency (weekly, bi-weekly, monthly), payment due dates, and late payment penalties. Cash flow is profit, so delayed payments cost you money.
7. Documentation Requirements
Specify what records you’ll maintain: daily time tickets, material receipts, photos, approval signatures. This protects you in disputes.
8. Mistake/Rework Billing
Who pays for errors? Without specific language, owners can legally dispute payment for rework. Address this upfront.
9. Right to Stop Work
Include the right to stop work for non-payment. This limits your exposure on projects where the owner stops paying.
10. Termination Clause
Define exit conditions and ensure payment for work completed if the contract ends early.
The NTE Clause: Protecting Both Parties
The not-to-exceed clause deserves special attention because it’s where many contractors lose profit.
What It Does
An NTE clause caps total project cost, giving the owner budget certainty while maintaining T&M flexibility up to that limit.
The Profit Trap
Standard NTE language protects the owner but can hurt you: when scope changes or conditions require more work, the cap often doesn’t change. Your markup gets squeezed as actual work expands while the ceiling stays fixed.
Protective Language
Include provisions that:
- Require written notice when approaching 75-80% of the NTE limit
- Automatically adjust the cap for approved scope changes
- Preserve your markup percentage even as the cap increases
- Allow renegotiation for significant unforeseen conditions
The goal: the NTE protects the owner from runaway costs while preserving your right to profitable compensation for actual work performed.
Common Mistakes That Kill Profits
These errors turn profitable T&M work into money-losing projects:
1. Underpricing Labor Rates
Rates that don’t cover full burden and overhead mean losing money on every hour billed. Calculate your true loaded cost before quoting rates.
2. Accepting Low Material Markup
A 10% markup rarely covers handling costs. Fight for 15-35% based on material complexity and handling requirements.
3. Poor Documentation
The biggest mistake. Without daily records of hours and materials, you can’t defend invoices when challenged. Messy tracking leads to payment disputes.
4. Unprotected NTE Clauses
Accepting a cost cap without scope change provisions guarantees margin erosion when additions occur.
5. Not Tracking Changes in Writing
Many contractors on T&M jobs don’t document additions because they expect payment for all work done. This leads to disputes. Keep owners notified in writing when new work is required.
6. Trust-Based Time Tracking
Self-reported time tracking provides little proof. Clients reject this data. Use verification-based systems—GPS, biometric, or supervisor sign-off.
7. Negotiating Bills Early
Agreeing to negotiate a T&M bill early in the job sets a bad precedent. It signals your documentation is weak and invites challenges on every invoice.
8. Ignoring Payment Terms
Not enforcing payment schedules delays cash flow and can leave you financing the owner’s project. Include and enforce late payment provisions.
Documentation Best Practices
Contractors winning T&M disputes share a common approach: verification-based systems that create defensible records.
Daily Requirements
- Time tickets: Worker names, hours, tasks performed
- Material receipts: Every purchase documented
- Photos: Progress documentation with timestamps
- Owner sign-offs: Daily or weekly approval of time tickets
Verification Systems
Replace trust with verification:
- GPS-verified clock-in/clock-out
- Biometric time tracking (facial recognition, fingerprint)
- Supervisor signature requirements
- Real-time dashboards with client view access
Some contractors include contract language specifying that time will be tracked via verified systems. This sets expectations upfront and reduces friction when invoices arrive.
Preventing Billing Disputes
T&M billing disputes usually stem from the same root causes:
Unclear Expectations
Solve with comprehensive contract language defining rates, markup, and procedures.
Questionable Documentation
Solve with verification-based tracking and daily owner sign-offs.
Surprise Invoices
Solve with regular cost communication. Don’t let invoices be the first time owners learn about expenses.
Scope Confusion
Solve with written scope definition and change order procedures for additional work.
Build Transparency
Consider giving clients view-only access to time tracking dashboards. When owners can see real-time headcount and verified clock events, trust increases and disputes decrease.
Frequently Asked Questions
What is a T&M contract?
A T&M (Time and Materials) contract is an agreement where the client pays for actual labor hours worked plus materials used, with markup for overhead and profit. Unlike fixed-price contracts, billing adjusts based on actual project work.
What markup should I charge on a T&M contract?
Material markup typically ranges from 15% to 35%, depending on complexity and handling requirements. Labor rates should be fully loaded to include wages, burden, overhead, and profit—not just wage rates.
How do I protect profits on a T&M contract?
Calculate accurate loaded labor rates, negotiate appropriate material markup, include protective NTE clause language with scope change provisions, maintain rigorous documentation, and use verification-based time tracking.
What’s an NTE clause and why does it matter?
A not-to-exceed clause caps total project cost. While it protects owners, standard NTE language can hurt contractors when scope changes don’t adjust the cap. Include provisions that preserve your markup when the cap increases for approved changes.
What’s the difference between T&M and cost-plus contracts?
Both reimburse actual costs, but they handle profit differently. T&M contracts build profit into labor rates and material markup. Cost-plus contracts reimburse costs plus a separate fee (fixed or percentage) for profit.
Key Takeaways
Structuring profitable T&M contracts requires attention to these fundamentals:
- Calculate true loaded rates: Include all burden, overhead, and profit in your hourly billing rates
- Set appropriate markup: 15-35% on materials covers handling costs and profit
- Include essential clauses: Labor schedule, material markup, NTE with scope change provisions, change order procedures
- Protect against NTE traps: Ensure the cap adjusts when scope changes
- Document everything: Use verification-based tracking and get owner sign-offs
- Communicate proactively: No surprise invoices—keep owners informed of costs
A properly structured T&M contract protects you from scope uncertainty and material volatility while ensuring you’re compensated fairly for actual work. The key is getting the details right before work begins.
