A Brief Introduction About Time and Materials Contract
As per a recent survey of the construction industry by the Census Bureau, it was revealed that it takes more than 11 months to construct an average multifamily building. Construction of homes, commercial buildings, and apartment facilities, and even residential houses can take several months to get completed. When you are working with a specific time frame and a pre-fixed plan, and you are well-aware of industry, it is relatively easier to figure out exactly how much you are required to charge for turning into a profit.
However, how about the time when scope and timelines are not pre-determined? This is when you should consider making use of a time and material contract. As per the definition of ‘what is a time and materials contract?’ this agreement is an excellent way towards ensuring that all your costs are covered during the estimation of a project.
At its core, time and materials contract sample is quite simple. The contractors will be reimbursed for the specific materials they will purchase. Moreover, they will also be paid a specific rate for the total time they will be working on the given job. In the end, it is important to agree on what specific materials will be getting the payment for and the application of the hourly rates.
Who Takes the Time and Materials Contract?
Time and Materials (T&M) agreements are known to involve both the parties that agree on a predetermined unit rate for a specific set of labor as well as materials. In the given contract, there is no predetermined price for construction. The time and materials agreement is used when it becomes impossible tow get an accurate estimate of the entire cost of the project in cases when the schedule cannot be determined, or wherein some changes are to be made during the construction process. A time and materials contract example can be utilized for presenting a higher risk for the client or the owner along with the least risk to the contractor as there is no specific limit on how long it will take to complete the project or how much it will cost in the end.
Purpose of the Time and Materials Contract
Time and materials –also referred to as the T&M agreement is a common term for a contract or template used in product development, construction, or any other related project. In this type of project and contract set up, the employer or project owner is known to make a payment to the contractor based on the total time spent by the employees of the contractors or subcontractors for performing the given work.
The contract is also made based on the entire materials that are used for construction along with the markup of the contractor on the utilization of materials. The contract does not consider the amount of work that is required for completing the given construction work.
Time and Materials construction contract is mostly made use of projects in which it becomes impossible to calculate the overall size of the project. It is also applicable in the case in which it is believed that the specific project requirements would change from time to time. The time and materials agreement is opposite to the fixed-price contract (time and materials vs. fixed-price contract) –here, the owner or project manager is known to agree to pay to the contractor as a lump sum amount for the fulfillment of the agreement irrespective of the amount the contractors will be paying to the subsequent suppliers, sub-contractors, and employees.
Most of the time and materials agreements are known to carry along a guaranteed maximum value for the price –known for putting an upper limit upon which the contractor will be charging. It also allows the project owner to pay some lesser amount once the job gets completed quickly.
Contents of the Time and Materials Contract
When you are preparing a typical labor hours contract, it is important to include all the important items of the agreement. When you go for the time and materials contract template download, here are some of the common clauses of the same:
- Labor Rate: Known for specifying a fixed rate for all the labor –even that of the administrative personnel. When T&M is being utilized on larger projects, the contractors might offer a discounted labor rate for reducing the overall cost of the project.
- Maximum Labor Hours: T&M agreements can be used for specifying a fixed number of hours (labor hours). In case the contract would exceed the specified number of labor hours, the additional labor hours cannot be billed to another party.
- Material Markup: Most of the time and materials agreement are known to specify around 15-35 percent of markup on the overall wholesale costs of the construction materials.
- Not to Exceed Clause: The NTE (Not to Exceed) clause in the T&M contract is known to feature a cap that can be used for representing the total amount to be charged by the given contractor. This clause helps in improving the overall efficiency of the contractor. This is because the given contract price tends to be limited to the specific cap amount –irrespective of how long the project would take or how high the costs of materials would run.
How to Draft the Time and Materials Contract?
While drafting the time and materials agreement, it is imperative for you to develop a certain level of commitment or trust with the client. In turn, you should be capable of providing a commitment through the estimates while maintaining a level of transparency with the given client.
It is recommended to create an estimate that helps in approximating the budget of the client while including around 15 percent margin when it comes to accounting for several changes. The time and materials agreement can help in providing flexibility for making the desired changes while drafting the content of the agreement.
When you are providing the client with a draft of the agreement, make sure that you are submitting an estimate of the total time as well as money the given project would require. For getting aid with the estimation process, and for helping the clients in understanding where all the money is going, you should break down the given estimate into several modules. You should also plug in the project requirements along with estimated hours and hourly rates while asking for recommendations towards meeting the specific needs of the clients.
Here are some of the useful tips when it comes to negotiating with the contractor or the client on the given time and materials agreement:
- As a client, make sure that you have checked the rate card to ensure that you are getting true value for your money.
- Review the invoices properly to understand how many hours the other party is charging out of your efforts.
- Try purchasing the materials directly to save some amount on the procurement of the same.
- As a contractor, you should not allow the client to dictate the terms & conditions of the contract to your team
Benefits & Drawbacks of the Time and Materials Contract
Some of the major benefits of the given construction contract are:
- With the help of the T&M contract, it becomes easier to pivot in case the specifications are required to be changed for the given project.
- The simple pricing structure as specified in the contract can help in allowing the ease of handling roadblocks or delays with improved confidence
- With the help of a valid contract, the negotiations become simpler. It is easier to set & specify rules for each party and also for stating what materials will be utilized and what rates will be set for completing the construction project.
Some of the drawbacks of the T&M contract are:
- Tracking time and materials can be a difficult task
- There is no benefit in being productive and efficient in the construction project
- The parties are responsible for fronting their respective costs
What Happens in Case of a Violation?
There are specific grounds on which the time and materials construction agreement can be violated or breached. With any party not agreeing to the specific terms & conditions of the contract, the other party can regard terminating the contract altogether in case of a violation.
A time and materials agreement is the right choice in most of the contraction projects out there. If you are skeptical about drafting the contract on your own, you should take professional help from a reliable lawyer for the same. It is also important to go through the terms & conditions of the contract explicitly for the best results.