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Time and Materials Contract: What Is It?
A time and materials contract, or T&M contract, is a contract that's used to reimburse one party for the costs of the materials needed to complete a job, along with a predetermined hourly wage and other fees related to the service being provided. This type of contract is used when the exact time frame, the overall cost of the project, and the rigidity of the project's terms are unknown to the hiring party.
For some, this type of contract can sound like too much trouble to pursue. For others, the fact that this contract allows them to base how much they pay on work anticipated rather than having to know each aspect about the project before it begins gives them the ability to get started with ease. Understanding whether or not it's right for you begins with figuring out if you meet some of these basic guidelines.
Here is an article that defines this type of contract further and gives you a specific example in regards to its use in the construction industry.
Advantages and Disadvantages of Time and Materials Contracts
Every contract comes with pros and cons that are crucial to assess before you begin crafting the specific contract for the individuals or organization you're working with. But what are the advantages and disadvantages of time and materials contracts? Let's break each of these down to get a better overview of what to expect when choosing this type of contract over other options at your disposal.
Advantages of T&M Contracts
- Provide you with the flexibility needed in your agreement as you're only paying a set amount for the materials and time taken to complete the project
- Make negotiating terms and conditions easy as these are established quickly when writing a T&M contract (as long as you and the contractors are able to reach a mutual agreement and neither party try to negotiate terms that would only provide benefits for themselves)
- Allow you to cap the maximum amount of hours for the project, which makes it so that you don't have to deal with clients who may take as much time as they want to make more money
Whether there are delays or projects are finished faster than expected, there are few consequences when using this type of contract. Overall, T&M contracts allow you the flexibility you need when you simply can't estimate the scope of the project when you're enlisting the help of a contractor.
That being said, there are some disadvantages that come with choosing a T&M contract instead of a fixed-price contract, which is a contract in which there is a set date for completion and exact terms and conditions regarding the cost of materials and pay.
Disadvantages of T&M Contracts
- Without a not-to-exceed clause and maximum caps on costs, you may find yourself facing issues with negotiations or contractors taking advantage of these missing items.
- You have to deal with the extensive process of actively tracking the materials being used for the project as well as the billable hours, which can be difficult to achieve, especially as you're running your own small business. The level of involvement in a T&M contract is far more than that required in a fixed-price contract.
- There's no established budget, which means total costs can far exceed what you anticipate having to pay initially.
Because there are a lot of unknown variables in the project that leads to a T&M contract, there are naturally many potential disadvantages that arise from these variables. It's important to carefully consider whether or not the disadvantages outweigh the risk. If not, you may want to take your time to do further research surrounding your project and consider a fixed-price contract instead.
To better understand the difference between T&M contracts and fixed-price contracts, read this guide on fixed-price contracts for a full overview of what it is and how it's utilized.
Image via Unsplash by markpot123
Should I Use a Time and Materials Contract?
Much like there are many unknown variables that lead to the development of a time and materials contract, there is no true guide that helps you define whether you should go with a T&M contract or not. Here are a few things to consider if you're not quite sure whether or not a T&M contract is right for you.
- Is it possible for you to determine a time frame and cost for the project either through experience or with the help of a third party? Some projects may have so many unknowns that it isn't possible to determine how long it will take or what the process will look like. However, if you don't have to leave the time frame and cost up to the contractors working on the project, it can be better to go with a fixed-price contract instead.
- Do you have the time to dedicate to tracking the cost of materials and hours? If you can't take care of this yourself or enlist the help of someone else to take care of this, it may be better to try to find a way to make a fixed-price contract possible.
- Are you prepared to deal with any changes in cost? If you want to have a strict budget you would like to adhere to so you don't end up overspending, this is not the best type of contract to go with for your project.
Approaching this type of contract can come with great risk. Fortunately, there are ways to mitigate these risks. If you plan on using a time and materials contract for a project, you can take fewer risks by enlisting the help of a contract lawyer. A contract lawyer who specializes in your industry can help you draft up a solid T&M contract that provides beneficial terms for you and the contractor, help ensure that you aren't missing any essential clauses that could prove damaging to your business later on, and help you negotiate terms and conditions with the signing party.
You can use this guide to learn more about the benefits of using a contract lawyer for your T&M contract needs.
In summary, a time and materials contract can be used when the entity hiring a contractor to work on a project is uncertain about the amount of time it'll take to complete the project, what the overall cost of materials will be, and what course the project will take as it is being completed. If you anticipate using a T&M contract or want to know whether or not it's something that your organization could or should utilize, use the guide above to dive deeper into time and materials contracts and consider enlisting the help of a contract lawyer to help you draft up a solid T&M contract today.
Meet some of our Time and Materials Contract Lawyers
David H. Charlip, the principal of Charlip Law Group, LC, is one of only 101 Board Certified Civil Trial Lawyers in Miami-Dade, with over 38 years of litigation experience. Mr. Charlip is also one of only 136 Florida Civil Law Notaries. He has managed and litigated cases across the country. Mr. Charlip has advised businesses, drafted business formation and purchase and sale documents and litigated business disputes for over 30 years and is very familiar with all aspects of contractual relations.
With over 16 years of experience in the area of estate planning, trademarks, copyrights and contracts, I am currently licensed in Florida and NJ. My expertise includes: counseling clients on intellectual property availability, use and registration; oversee all procedural details of registration and responses with the USPTO/US Copyright Office; negotiate, draft and review corporate contracts and licensing; counsel clients on personal protection, planning and drafting comprehensive estate plans.
Melissa Taylor, the President and founding partner of Maurer Taylor Law, specializes in business contract review and drafting and is a second-generation attorney with private firm, in-house counsel, governmental, entrepreneurial, and solo practitioner experience. Melissa has a strong legal background, a dedication to customer service, is friendly, warm and communicative, and is particularly skilled at explaining complex legal matters in a way that's easy to understand. Melissa personally handles all client matters from start to finish to ensure client satisfaction.
Lawrence A. “Larry” Saichek is an AV rated attorney and a CPA focusing on business and real estate transactions, corporate law and alternative dispute resolution. With a background including five years of public accounting and six years as “in house” counsel to a national real estate investment company, Larry brings a unique perspective to his clients – as attorney, accountant and businessman. Many clients think of Larry as their outside “in house” counsel and a valued member of their team. Larry is also a Florida Supreme Court Certified Mediator and a qualified arbitrator with over 25 years of ADR experience.
Entertainment Attorney with 30+ years of experience, representing all aspects of the TV, Film, Music and Publishing Industries
Aaron focuses his practice on startups and emerging growth companies, providing general counsel services for companies from formation through exit. Aaron frequently advises clients in connection with routine and unique legal, business, and strategic decisions, including corporate, business and technology transactions, angel and venture financings, mergers and acquisitions, protection of intellectual property, and information privacy and data security.
I enjoy helping businesses of all sizes succeed, from start-ups to existing small and medium sized businesses. I regularly advise corporate clients on a variety of legal issues including formation, day to day governance, reviewing and drafting business contracts and other agreements, business acquisitions and sales, as well as commercial and residential real estate issues, including sales, purchases and leases. As an attorney licensed in both Michigan and Florida, I also advise clients on real estate issues affecting businesses and individuals owning real property in either state, whether commercial, residential or vacation/investment property. I also regularly assist nonprofit organizations in obtaining and maintaining tax exempt status, and provide general legal counsel on all matters affecting public charities, private foundations and other nonprofit organizations.