Last year I watched a HVAC contractor turn down a $2 million fixed-price contract and counter with a time-and-materials proposal.
The GC initially balked. But the contractor explained: the existing conditions were too uncertain, the drawings were incomplete, and a fixed price would force him to add a massive contingency that would cost the GC more in the long run.
The GC agreed to T&M with a not-to-exceed cap. The final cost came in 15% below what the fixed-price bid would have been — and the contractor made good margin on every hour worked.
Time and materials contracts aren't right for every situation, but when they're right, they're really right.
What Is a Time and Materials Contract?
A time and materials (T&M) contract is a pricing arrangement where the subcontractor is paid based on:
**Time:** Actual labor hours worked, multiplied by agreed hourly rates
**Materials:** Actual material costs, usually with an agreed markup
This contrasts with:
**Fixed-price (lump sum):** One agreed price for the entire scope
**Unit price:** Agreed prices per unit of work (e.g., per linear foot, per fixture)
**Cost-plus:** Actual costs plus a fixed fee or percentage
T&M contracts put the risk of cost overruns on the customer rather than the contractor.
When T&M Makes Sense
Undefined or Uncertain Scope
When the full extent of work can't be defined upfront — existing conditions are unknown, design is incomplete, or requirements may change — T&M reduces risk for both parties.
Renovation and Retrofit Work
Opening up walls reveals surprises. T&M lets you address what you find without constant change order negotiations.
Emergency or Time-Sensitive Work
When there's no time for detailed estimating, T&M gets work started immediately.
Small Additions to Existing Contracts
For minor additional work, T&M is often simpler than formal change orders.
Highly Variable Work
When the quantity of work is unpredictable — maintenance, repairs, troubleshooting — T&M matches compensation to actual effort.
When T&M Is Risky
Large, Well-Defined Projects
If the scope is clear and quantifiable, fixed-price usually works better for everyone.
Low-Trust Relationships
T&M requires trust. If the customer doesn't trust you, they'll question every hour and every material charge.
Tight Owner Budgets
Owners with fixed budgets may prefer knowing the exact cost upfront, even if it's higher.
Competitive Bidding Situations
It's hard to bid T&M against fixed-price competitors. You may lose the job even if T&M would be smarter.
Structuring a T&M Contract
If you're going T&M, get the terms right:
Labor Rates
Define rates for each labor category (journeyman, apprentice, foreman, etc.). Include:
Rates should cover fully-burdened labor costs (wages, taxes, benefits, insurance) plus your overhead and profit.
Material Markup
Standard markups range from 10-25% for materials. This covers:
Equipment Rates
If you're providing equipment, define rental rates. Many contractors use published rate books (like Rental Rate Blue Book) as a reference.
Not-to-Exceed Caps
GCs often want a not-to-exceed (NTE) cap limiting total T&M costs. This provides budget protection while keeping T&M flexibility.
Documentation Requirements
Specify how time and materials will be documented and approved:
Daily Documentation Is Critical
Your T&M success depends entirely on documentation:
Time Tracking
Material Tracking
Change Tracking
Without documentation, you'll lose money to disputes over what hours were actually worked and what materials were actually used.
The Profit Math on T&M
Let's break down how T&M should work financially:
Example: Electrician
Example: Materials
If you're billing 2,000 hours at $70 and $50,000 in materials at 20% markup:
This assumes full rate realization. In reality, some hours may be disputed, some materials may not bill through, and you need to account for that.
Common T&M Mistakes
Rates Too Low
Setting rates that cover labor but not overhead and profit. You're working but not making money.
Poor Documentation
Without daily sign-offs, you'll fight over hours billed. The GC's memory is never in your favor.
No NTE Provision
Open-ended T&M can scare customers. A reasonable NTE cap provides comfort while protecting your flexibility.
Assuming All Hours Bill
Some hours don't bill — unproductive time, travel that's not billable, time waiting for other trades. Account for this.
Material Delays Without Backup
If materials are special order, document that. Customers forget why they approved premium pricing.
Negotiating T&M Terms
When negotiating T&M contracts:
Start High
Your initial rate proposal should have room to negotiate. GCs expect to push back.
Benchmark Against Market
Know what competitors charge for similar work. Be prepared to justify your rates.
Include Escalation
For long projects, include annual rate escalation clauses. Labor costs rise.
Protect Your Markups
Resist pressure to reduce material markups below 15%. The administrative effort alone justifies markup.
Clarify Exceptions
What's billable and what's not? Travel time? Small tools? Consumables? Get clarity upfront.
Converting T&M to Fixed Price
Sometimes projects start T&M and convert to fixed price once scope becomes clear. If this happens:
Document Current State
Before converting, agree on what's been completed and what remains.
Price the Remaining Work
Provide a fixed price only for the defined remaining scope.
Handle Changes Separately
Any changes after conversion are change orders — don't let T&M scope creep into your fixed price.
Using Technology for T&M Management
SubPaid streamlines T&M tracking:
The subcontractors I work with who use digital T&M tracking bill more accurately and have fewer disputes.
Frequently Asked Questions
What's a reasonable profit margin on T&M work?
Most contractors target 8-12% net profit on T&M work. Your rates should include this.
Can I combine T&M with fixed-price on the same project?
Yes. It's common to have fixed-price base scope and T&M for uncertain portions.
How often should I invoice T&M work?
Weekly or bi-weekly is common. Don't let unbilled T&M accumulate — it creates collection risk.
What if the customer disputes hours?
Daily sign-offs prevent most disputes. Without sign-offs, you'll need to rely on your documentation and negotiate.
Should I show my cost breakdown to customers?
It depends on the relationship. Some customers want transparency; others just want fair rates.