A time and materials (T&M) contract pays you for the actual hours worked and materials used, plus an agreed-upon markup. It’s the flexible alternative to fixed-price agreements and ideal when project scope is uncertain or likely to evolve.
While only about 20% of construction projects use T&M contracts, understanding when and how to use them can protect your profits and strengthen client relationships on the right projects.
What is a Time and Materials Contract?
A time and materials contract is a construction agreement where the project owner pays for:
- Actual labor hours worked at predetermined hourly rates
- Actual cost of materials used
- A markup percentage for overhead and profit (typically 15-35%)
Unlike a lump sum or fixed-price contract that locks in total project cost upfront, T&M billing is based on what actually happens during construction. If unforeseen conditions extend the work, you bill for the additional time and materials. If the project wraps up faster than expected, the client pays less.
This approach is common when renovating older buildings where removing walls might reveal rot, outdated wiring, or plumbing issues not visible before work started.
How Time and Materials Contracts Work
The basic mechanics of a T&M contract are straightforward:
- Establish labor rates: You set hourly rates for each labor category—carpenter, electrician, laborer, project manager, etc. These rates should be “fully burdened,” meaning they include wages, payroll taxes, insurance, benefits, overhead, and profit.
- Agree on material markup: Specify the percentage you’ll add to material costs. Industry standard is 15-35%, covering handling, storage, pickup time, and profit.
- Track everything: Document all labor hours and material purchases daily. Time tickets should be signed by an owner representative when possible.
- Bill regularly: Submit invoices weekly or monthly showing itemized labor hours, rates, and material costs with receipts.
- Get approvals: The owner reviews and approves invoices based on your documentation.
Key Components of a T&M Contract
A well-structured time and materials contract should include these essential elements:
Labor Rates Schedule
List hourly rates for each worker classification. For example:
- Carpenter: $75/hour
- Licensed electrician: $95/hour
- General laborer: $45/hour
- Project supervisor: $85/hour
Rates should reflect your fully burdened costs plus profit—don’t underprice yourself.
Material Markup
Specify the percentage added to material costs. Be clear about what’s included: purchase price, sales tax, delivery charges, and any restocking fees for returns.
Payment Terms
Define billing frequency (weekly, bi-weekly, monthly) and payment due dates. Consider tying some payments to milestones as an efficiency incentive.
Not-to-Exceed (NTE) Clause
A cap on total project cost protects the owner’s budget while maintaining T&M flexibility. When you approach the limit, notify the owner and get written authorization to continue.
Scope of Services
Even with T&M flexibility, define the general nature of work. This prevents scope creep debates about what’s covered under the original agreement.
Documentation Requirements
Specify what records you’ll maintain: daily time tickets, material receipts, photos, and approval signatures.
Time and Materials vs. Fixed-Price Contracts
Understanding how T&M differs from fixed-price (lump sum) contracts helps you choose the right approach for each project.
| Factor | Time & Materials | Fixed-Price |
|---|---|---|
| Price basis | Actual hours + materials + markup | Predetermined total price |
| Scope flexibility | High—adapts to changes easily | Low—changes require formal modification |
| Financial risk | Primarily on owner | Primarily on contractor |
| Budget certainty | Lower (unless NTE clause) | Higher |
| Documentation | Extensive tracking required | Less ongoing documentation |
| Best for | Uncertain scope, renovations | Well-defined projects |
Industry data shows about 80% of construction projects use fixed-price contracts. Clients often prefer them because budgeting is easier and their risk is lower. But for the right projects, T&M protects contractors from scope uncertainty while giving owners transparency into actual costs.
When to Use a Time and Materials Contract
T&M contracts are the right choice when:
- Scope is undefined: You can’t accurately estimate a project you can’t fully see or understand upfront.
- Renovation work: Opening walls in older buildings often reveals hidden conditions—rot, termite damage, outdated systems—that can’t be predicted.
- Emergency projects: When speed matters, T&M lets work begin immediately without lengthy estimating and bidding processes.
- Volatile material prices: When lumber, steel, or other materials are fluctuating significantly, T&M protects you from pricing risk.
- Maintenance and repairs: Variable scope work where you won’t know the full extent until you start.
- Specialty work: Complex or unusual projects where experienced estimators still face high uncertainty.
When to Avoid T&M
- Well-defined projects with clear scope and quantities
- Clients who need strict budget certainty
- Competitive bid situations where fixed-price is expected
- Projects where you want to capture efficiency gains as profit
Advantages of T&M Contracts for Contractors
T&M contracts offer several benefits:
Reduced Financial Risk
You’re reimbursed for actual costs throughout the project. If unforeseen conditions emerge, you bill for the additional work rather than absorbing losses.
Easier Negotiation
Without the need to precisely estimate every aspect of uncertain work, contract negotiation is faster and simpler.
Quick Project Starts
Projects can begin immediately without extensive pre-construction estimating. Owners know they’ll pay actual costs, so detailed upfront pricing isn’t required.
Transparency Builds Trust
Owners see exactly what they’re paying for in hours worked and materials used. This transparency can strengthen client relationships and lead to repeat business.
Flexibility for Changes
When owners want modifications mid-project, T&M accommodates changes naturally without formal change order negotiations for every adjustment.
Risks and How to Mitigate Them
T&M contracts come with challenges. Here’s how to address them:
1. Budget Overruns
Risk: Without a cap, costs can exceed the owner’s expectations, leading to disputes.
Solution: Include a not-to-exceed (NTE) clause. This gives the owner budget certainty while maintaining flexibility up to that limit.
2. Efficiency Questions
Risk: Because you bill hourly, owners may suspect you’re working slowly to increase billing.
Solution: Tie some payments to milestones. Set maximum labor hour limits where you absorb hours beyond the cap. Build relationships where trust eliminates these concerns.
3. Billing Disputes
Risk: Disagreements over hours worked or material costs can lead to payment delays or legal action.
Solution: Maintain detailed daily documentation. Get owner signatures on time tickets. Provide receipts for all materials. Leave nothing to memory or interpretation.
4. Administrative Burden
Risk: Tracking every hour and receipt requires significant administrative effort.
Solution: Use digital tracking tools and mobile apps. Establish clear processes for daily documentation. The investment in systems pays off in reduced disputes.
5. Client Cash Flow Problems
Risk: Owners may run out of money mid-project, especially if they’ve made additions that increased costs.
Solution: Communicate costs regularly—don’t let invoices surprise anyone. Establish clear payment schedules and enforce them.
Setting Labor Rates
Your hourly rates must cover all costs and generate profit. General contractors typically charge $50-$150 per hour, varying by trade, experience, and location.
Calculate Fully Burdened Rates
Your billing rate should include:
- Base hourly wage
- Payroll taxes (Social Security, Medicare, unemployment)
- Workers’ compensation insurance
- Health insurance and benefits
- General overhead allocation
- Profit margin
Example rate calculation:
- Base wage: $30/hour
- Labor burden (30%): $9
- Overhead allocation: $12
- Profit (15%): $7.65
- Billing rate: $58.65/hour (often rounded to $60)
Different labor categories warrant different rates. A licensed electrician commands a higher rate than a general laborer—your contract should specify rates for each classification.
Material Markup Best Practices
The standard material markup in T&M contracts ranges from 15% to 35%. This covers:
- Time spent ordering, picking up, and handling materials
- Storage and staging costs
- Freight and delivery charges
- Returns and restocking coordination
- Overhead and profit
Tips for Material Billing
- Keep all receipts—no exceptions
- Clearly state in the contract what markup applies to (purchase price, tax, delivery)
- Return unused materials and credit the owner
- Be transparent about pricing because trust is essential for T&M success
Documentation Requirements
Documentation is your protection in a T&M contract. Industry experts recommend keeping records for at least seven years.
What to Track Daily
- Time tickets: Worker names, hours worked, tasks performed
- Material purchases: Receipts, quantities, costs
- Photos: Before, during, and after documentation
- Progress notes: What was accomplished each day
- Owner communications: Decisions, approvals, change requests
Get Sign-Offs
Have the owner’s representative sign time tickets daily or weekly. This prevents disputes later about whether hours were actually worked or authorized.
Best Practices for T&M Success
- Build trust first: T&M works best with established relationships. Consider using it for repeat clients or after successfully completing a fixed-price project together.
- Communicate constantly: Keep owners informed of progress and costs. No surprises on invoices.
- Document everything: If it’s not documented, it didn’t happen. Protect yourself with thorough records.
- Use NTE clauses: Give owners budget certainty while maintaining your flexibility.
- Invoice promptly: Bill on schedule with complete backup documentation. Delays invite scrutiny.
- Consider hybrid approaches: Some contractors start with T&M until scope becomes clear, then convert to fixed-price for the remaining defined work.
- Invest in tracking tools: Digital time tracking and expense management software reduces administrative burden and improves accuracy.
Frequently Asked Questions
What is a time and materials contract?
A time and materials contract is a construction agreement where the owner pays for actual labor hours worked plus materials used, along with an agreed-upon markup for overhead and profit. Unlike fixed-price contracts, the final cost depends on actual work performed.
What is the typical markup on a T&M contract?
Contractors typically add a markup of 15-35% on materials. Labor rates are “fully burdened” to include wages, taxes, insurance, overhead, and profit—so markup is built into the hourly rate rather than added separately.
When should I use a time and materials contract?
Use T&M when project scope is uncertain, you’re doing renovation work where hidden conditions may emerge, material prices are volatile, or the project requires quick start without time for detailed estimating.
What’s the difference between T&M and cost-plus contracts?
The terms are often used interchangeably. Both reimburse actual costs. The main distinction is that T&M typically has pre-set hourly labor rates, while cost-plus may reimburse actual wages with a separate fee or percentage added for profit.
How do I protect myself on a T&M contract?
Maintain detailed daily documentation of all hours and expenses. Get owner sign-offs on time tickets. Include a not-to-exceed clause to cap total costs. Communicate proactively about progress and expenses.
Key Takeaways
Time and materials contracts provide essential flexibility for construction projects with uncertain scope:
- Right fit matters: T&M is ideal for renovations, emergency work, and undefined scope—not for well-defined projects where fixed-price makes sense.
- Documentation is protection: Track everything daily and get owner sign-offs to prevent disputes.
- Price accurately: Your hourly rates must cover full labor burden plus overhead and profit.
- Use NTE clauses: Protect owners with cost caps while maintaining flexibility.
- Build trust: T&M works best with established client relationships where both parties operate in good faith.
When used appropriately, T&M contracts protect contractor profits on uncertain work while giving owners transparency and fair pricing for what’s actually required to complete their project.
