In 2018, 52% of project rework in the U.S. was caused by poor project data and miscommunication at the cost of $31.3 billion, reports Autodesk + FMI. In 2021, inaccurate tracking and delayed visibility into project time & materials (T&M) data continue to cloud the general contractor’s ability to control costs both within and outside of contracts. The problem is clear—the T&M process is painful for everyone.
Out-scope work accounts for roughly 9% of total project costs on average when the direct cost of labor, material, and equipment is combined with indirect costs such as field supervision, project management, and site safety.
With time & materials work representing a potentially significant impact on a contractor’s bottom line, it is critical to truly understand the critical features of the time & materials workflow and how effective tracking can drive better results on your projects.
Why is detailed time & materials tracking essential for both subcontractors and general contractors?
Accurately documented correspondence is required to reduce any questions on payment. The contractor must account for all operating expenses, including costs for overhead. The cost exposure for out-of-contract work is substantial for all stakeholders. With the environment around a construction project constantly shifting, capturing timely and specific details for T&M is even more critical.
Whether from last-minute requests, weather delays, or another trade contractor putting in extra work orders (aka time & material tags), the scope of work can constantly change. Even though project owners will create payment invoices, contractors need to track time & materials work independently. Documenting labor hours and materials used on specific tasks and project types will help build a historical understanding of pricing and associated work costs. These insights can inform future project estimates, ensuring your team sets the right expectations around future time & materials contracts.
T&M tags are crucial for creating, tracking, and managing “at-risk” work that can mean the difference between profit or loss on every project.
Subcontractors and T&M tags
Time & materials tags on documented work represent direct revenue for a Subcontractor. In many cases, the subcontractor will complete this work ahead of approvals to avoid schedule slippage. Delays or rejections for whatever reasons can mean a financial loss, eroding profit margins for the subcontractor if work is not reimbursed.
General contractors and T&M tags
For legitimate T&M tags, general contractors (GC) will cover costs for work within the existing project budget and rely on the project owner’s reimbursements. If T&M tags are questionable, the responsibility falls on the parties to resolve. Suppose the tags are late or difficult to understand. In that case, the general contractor is in a difficult position to either 1. dispute the costs with the Subcontractor or 2. strain the relationship with the project owner to get approval. Strong communication and collaboration between GC and subcontractor can help avoid these conflicts, but a dated tracking and approval process makes this nearly impossible.
The following represent critical facets of an effective time & materials strategy:
1. Rock-solid documentation
In construction, the workflows surrounding at-risk work can be among the most frustrating interactions between owners, general contractors, and trade contractors.
Whether scope-of-work changes come from an owner, an improper field installation, or rework at the end of a project, the demands of at-risk work require ironclad documentation every step of the way. This need for detailed and trackable T&M tags is essential and is precisely where paper and simple PDF documents fall short.
When you use digital tools like Rhumbix, the T&M tag is instantly shared with all stakeholders, and the documentation is clean and professional. Photo documentation can be easily attached to the T&M tag, as well.
2. Workflow and reporting standardization
It’s crucial to have a well-defined process for everything from producing a contract to executing your services.
Consistent and streamlined processes for time & material tags make the administrative burden easier. However, the process starts with the contract, and executing it begins with the contract’s details. Every time & materials contract should include four details:
- Labor Rate
- Material Markup Percentage
- A Defined Cap (if any)
- Maximum Labor Hours (if any)
3. Clear contract expectations
Labor rates are established hourly rates for services. Material markup percentages are the total percent of the material’s cost that you layer onto the price. Both are necessary for a time & materials contract.
Depending on the agreement’s terms, your client may also have a defined budget cap, or your business has a maximum number of labor hours. Both are extremely helpful for defining parameters for the project.
Why limit the number of labor hours to work on a project? Are you setting your firm up to take a financial miss?
By capping the maximum number of labor hours, your finance team can help manage a healthy revenue stream. By establishing guidelines on the services provided, you set guardrails to prevent out-of-scope work from straying too far off the contract. You limit risk.
Setting expectations starts with the contract to outline your services’ processes and make sure it’s crystal clear. Even with this kind of contract’s flexibility, clear phases, expectations, and deadlines are essential.
4. Clear team member expectations
Once your contract is inked, you should already have a transparent process for executing the agreed-upon services. This is emphasized with how and when your time (hours) and materials are tracked on the project.
Best practices encourage your team to track hours and material expenses as soon as possible. Any delays in recording this information, the greater your risk for error grows.
Many companies make it a standard to track hours and materials upon completing each task, session, or job. However, some common challenges come with this task, including:
- Accidental duplicate reporting
- Unreported hours or materials
- Guessing estimated time and costs
To avoid these problems both in the field and back-office, it is best to refrain from using a highly manual and paper process. The more automated you can set up time & materials tracking, the better.
What makes time & material tagging so challenging?
To ensure compensation for at-risk work, contractors need detailed reports that chronicle the labor, equipment, and materials utilized and any vital notes around the source of the work or issues leading to it. Providing this proper documentation in a timely and professional manner helps ensure that all parties feel the necessary transparency required for approvals.
Current paper-based time & materials tracking processes are painful
The typical time & materials tag process is manual and very painful for all stakeholders. Subcontractors submit tags for nearly every project and the administrative burden of tracking.
T&M tags in the field have come to require a full-time job for both GC and Subcontractor office teams. One T&M tag typically represents a few hundred dollars in isolation, but it can quickly add up to hundreds of thousands of dollars. And this does not include the administrative costs and lost direct revenue for Subcontractors.
Even with mobile devices and laptops on the jobsite, time & materials tags are still done principally on triplicate carbon copy paper. Copies are made for the General Contractor, Subcontractor, and Jobsite Construction Manager.
Costs are sometimes applied to a time & material tag in an associated change order request using the project’s rates. Once the change order request is created, it is scanned and emailed to the customer, awaiting approval for days, sometimes weeks, even though the subcontractor has already completed the work. This compensation limbo between costs incurred by the subcontractor and GC payout is why some contractors refer to time & materials work as at-risk.
Paper tracking leads to significant reporting delays and error
With most contractors still capturing and managing time & materials work on paper, construction teams face even tougher obstacles. The following highlight some of the factors driving a prolonged and often contentious time & materials workflow for both subcontractors and general contractors:
- Documents are written sloppily by hand.
- Documents are challenging to read.
- Photo documentation rarely exists.
- Copies are physically driven from the jobsite to the office.
- Documents get scanned and uploaded for backup.
- Backlogs and delays increase with a slow process.
- Damaged tickets (coffee spills or dirt smudges on copies).
- Completed tickets get virtually or physically lost!
- The documentation looks more like archeological artifacts than professional, accessible documents.
Ten critical issues caused by inefficient time & materials tracking
Delays in the processing process remain among the most significant issues caused by paper time & material tags. These tags can go days, weeks, and even months before being reviewed disputed, or approved. With each delay, there is a new cost associated with the tags.
Furthering the problem, submitted tags without a clear description, no photo documentation, or poorly written, create questions around their legitimacy. Better documentation means faster approval and improved risk management for everyone. Below are 10 critical issues caused by inefficient time & material tracking:
- Project delays caused by contractual confusion.
- Delays in communicating safety hazards, delay impacts or the need for extra work from the field to your office.
- The administrative burden for both GC and sub becomes a full-time job.
- The chaotic process involves numerous handoffs, approvals, transformations, and endpoints.
- Loss of direct revenue for the sub.
- Delay in payments for work already performed for Sub.
- Evaporated profit margins from out-of-contract work performed.
- Poor accounting for T&M strains relations between GC’s, owners, and subs.
- Increased at-risk exposure from out-of-scope work orders or time & materials.
- The “Carbon Locker” effect–a new data silo containing unsearchable, hard-to-analyze documents.