A time and materials contract is a written agreement between two or more parties, creating legal obligations like any other contract. It is an essential document for any business and must be created with care to avoid potential lawsuits in the future.
A contract should cover the following: Parties and their role, Duration and termination of the contract, Allowed hours per day, Outcome or deliverables required, Terms of compensation and payment, Reporting or progress expectations, and any other requirements.
A Time and Materials contract (T&M) is one in which you are paid for the time you work plus cost-reimbursable expenses for factors such as materials or subcontracting. T&M projects allow you to provide your client with an accurate quote without knowing exactly how much their project will cost. Both fixed price and time and material contracts in project management are legitimate contract types with advantages.
Time and material contract example: A Company is hiring a graphic designer for a two-year contract with a $50k salary that requires the designer to work 18 hours per day. It’s defined in the contract that the designer will be paid $50k at the end of each year regardless of hours worked.
The employee rescues two weeks for vacation. The contract can be terminated if one party tells the other in a written notice that they want to proceed with self-termination.
Understanding the relationship between time and materials has long been a cornerstone in project management. Typically, it is a contract type in which the total price is the sum of all costs, such as direct materials, labor, and overheads. Any given contract can either be a fixed price or a time and material contract.
Types of Contracts
Time and Materials vs Fixed Fee Price Contract
A fixed-price contract would be the most traditional type of contract. It is an agreement between two parties in which the work is estimated to cost a certain amount, and you receive it upon completion.
The most common trade-off in a fixed-price project is time, and there is usually a risk that one party will use less time than estimated, giving the other party no opportunity to complete their work. This would be due to unforeseen constraints, such as natural disasters, workforce conflicts, and financial limitations.
Cost-plus contract
Contracts are based on the idea that you have a contract with a price and must consider time. The price is fixed, but there is a multiplier put to it. There are two types of Cost Plus Contracts: single cost plus and double cost plus. In single cost plus, the total contract price is determined by multiplying the list prices by a multiplier or commission (usually 1% to 5%).
Time and Materials Engagement model
The time and material (T&M) engagement model is a contractually agreed-to-cost-plus basis for the project. A client pays a fixed price for the time and materials required to complete the deliverables.
The T&M model is mainly applicable when a client has a limited understanding of the scope of work. This model helps manage risk by setting a fixed price covering all related expenses.
When to Use Time and Materials Contract?
This contract is commonly used in the following cases:
The client has a limited understanding of the scope of work and expects that part or whole work can be completed without proper project management.
When you have a project that requires specific skills and expertise that are not available to the client, adding capital makes it easy for you to get a customized scope per your requirement.
You are hired on a consultancy basis and given a fixed price that covers time and materials together.
It is a good option for limited budgetary resources.
When you have a project that has to be completed in a short time frame, and you do not want to consume excessive time and waste it, the T&M model will help you get your job done at less cost.
When you are paid on a fixed price basis and have to decide the scope of work based on your expertise, it is easy for you to get your work done only at a fixed price that is economical and efficient.
When the scope of work for a project is not clearly defined, you are willing to take risks and challenges in the form of limitations.
How Time and Materials Contract Works
In this model, every time and material expenditure required to complete the deliverables will be added to your bill as they occur; there is no specific time limit that specifies when you are supposed to be completed your task.
A fixed T&M budget is estimated at the beginning of the project. The fixed budget is used to cover all expected costs throughout the project.
The payment process in this model is generally in two steps:
1. The client deposits an advance amount which is generally 50-60% of the total price, to make sure that you are committed to the project, and then the rest 40-50% of the total cost is paid when the scope of work is agreed upon between client and contractors.
2. The remaining cost will be paid to you at the end of the project when a client has completed the deliverables.
Pros and Cons of Time and Materials Contracts
Pros
Fixed-rate of pay for time and materials.
Time and materials are allowed to flow according to your expertise and work experience; this gives you greater freedom in managing tasks as required.
Cost containment controls all time spent on the assignment and project execution; this helps achieve good financial results within limited budgets by managing stress levels, risks, and other areas that could affect operating costs over time.
T&M contract is an expert-based decision-making tool that benefits the organization when the manager and clients are of similar knowledge levels.
It is easier to manage the resources assigned to tasks, as there are no strict deadlines or specific time frames.
Predictability and less stressful atmosphere for all stakeholders by managing the risk levels at a maximum level much more efficiently compared to other models.
Cons
Lengthy process- The Time and Materials contract model generally has more extended processing.
Inappropriate use of the Time and Materials contract model can result in unnecessary costs and potential expense overruns for the client.
Not all costs can be controlled- You cannot control some costs; therefore, it is hard to make good decisions regarding the resources throughout the project lifecycle, which might result in significant unexpected costs that would have otherwise been unseen by you.
Client involvement is less if not absent, and this might lead to low performance on their end.
It is difficult for you to complete the project on time when there are more changes incorporated into the project by the clients due to less involvement from the client’s end.
Time & Materials FAQs
What are the different types of contracts?
Contracts can be either Time and Materials contract (T&M), Costplus, or Fixed Price. -The T&M contract is the most common type in sales, particularly sales to small and medium-sized companies.
What does a time and materials contract mean?
A time and material contract is a type of contract used in project management. It allows the customer to pay based on actual costs when they occur. The payment is at an agreed-upon fixed rate.
What is the difference between the T&M and fixed-price contracts?
The Fixed Price Contract and the Time and Materials Contract (T&M) both provide you with a rate (commonly referred to as a “fee”) for services, but the T&M contract is more flexible in that it allows you to bill based on actual hours worked.
What is the difference between the T&M and Cost Plus contracts?
Cost-reimbursement contracts reward businesses based on authorized expenditures as opposed to the completion and delivery of a good or service. Time-and-materials contracts allow for the purchase of commodities or services based on a certain number of direct labor hours.