A time and materials contract requires a client to pay for a contractor’s time and money spent on materials. They usually specify an hourly rate plus a markup for materials. While many of these contracts are based on an estimate, the estimate may not be the full price required at the end of the project. As a result, you need to understand how to create binding and enforceable time and materials agreements and how to effectively manage them.
This type of contract can be useful and necessary but requires appropriate contract management to handle effectively. Modern software lets you easily modify template agreements that fit your needs but save you valuable time. It can also analyze specific contract metrics to help you streamline your contract lifecycle and improve revenue from your projects. With advanced data analysis at your disposal, you can decide how to handle your time and materials contracts and how to improve your business model.
What is a time and materials contract?
A time and materials contract is a legally binding document that is commonly used in the construction industry. One party agrees to pay a contractor for the costs of all materials needed to finish a job as well as a predetermined hourly wage for the work performed. It may also include any fees related to the provided services. It allows a contractor to know that they will be paid for their expenses as well as their labor.
A contractor will typically provide some form of estimate for the time and materials the project will require. The client must be aware, however, that this estimate may not cover all of the expenses, and the cost could be higher in the end.
Examples of a time and materials contract
A time and materials contract is commonly utilized in the construction industry. For example, a client may wish to redo their kitchen. The contractor will look into the scope of the project, the materials needed to complete the job, and the time it will take to do so. The contractor will then provide an estimate as to the costs of completing the kitchen renovation. A time and materials contract will specify the hourly rate and obligate the client to pay for the time it takes to complete the project, as well as the cost of the materials.
Other situations where a time and materials contract may be used include, but are not limited to:
- Home renovations
- House construction
- Commercial construction
- Government contracts
The purpose of a time and materials contract
The purpose of a time and materials contract is to ensure that the contractor is paid in full for their services. Unlike fixed-price contracts, which utilize a price that will not change, a time and materials contract plans for the changes that can occur. The estimate provides the client with what to expect in terms of cost but also makes clear that this number is not firm and could change based on the actual requirements to complete the work.
This type of agreement provides flexibility for a contractor, rather than making them gamble on whether a project can be completed for a set price. It also makes negotiation easier, as both parties choose a fair rate of pay for the work performed rather than choosing numbers exclusively beneficial to one party.
When do I need a time and materials contract?
Time and materials contracts are best used when the scope of the job cannot be exactly determined before the work begins. This is typical in construction projects but may also apply to software companies and many other product creation businesses. If the risks are too high for a fixed-price contract, a time and materials contract is a fair way to ensure you are compensated for your actual work.
Parts of a time and materials contract
A time and materials contract should include important provisions like:
- Labor rates: This should include the hourly rate for laborers, subcontractors, and any other workers on the project. It should also include administrative hourly rates if applicable.
- Maximum labor hours: The contract may specify a maximum cost or percentage of the estimated price. This helps ensure the project does not run wildly over budget.
- Materials costs and markup: The client is usually billed for the actual cost of materials and a markup of somewhere between 15% and 35%.
- Time and materials not to exceed clause: This clause covers the costs of the entire project, rather than just labor. This helps the client know what they will spend at a maximum.
- Breach of contract clause: This provision will specify what will occur if either party breaches the agreement. It may include a liquidated damages clause, choice of law provision, venue choice, and much more.
- Disclaimers: Many contractors include disclaimers for warranties, especially as to the quality of the product chosen by the client. If a client chooses particular materials for the project, the contractor may not want to be on the hook for the quality of those products.
- Modifications clause: In most projects, something will need to change. Whether the change is a necessity of the project or a result of the client’s choice, the time and materials agreement should outline how a change may occur and when it is legally enforceable.
- Payment milestones: The contract should include dates for payment. This may be at the project’s completion, or at certain specified points throughout the project. The milestone may also be periodic, such as weekly or monthly.
Limitations of a time and materials contract
While there are many advantages to using a time and materials contract, there are also limitations. If the contract does not include a maximum cap on costs, you may find yourself facing high costs you were not expecting. Without this limitation, a time and materials contract could legally obligate you to pay the full costs of the contract.
Time and materials contracts also require detailed tracking of labor hours and material costs. These costs must be specifically tailored to the agreement with the client, as these numbers can change depending on who you are working with. Advanced contract lifecycle management tools let you easily ascertain contract details and integrate them with your existing systems.
How to create a time and materials contract
You can create a time and materials contract by utilizing template software to create a form agreement. This becomes your starting point. It is a document that meets all of your basic needs and can be used in most situations. It is approved by your Legal team and ready to use as is with simple fillable areas. It can also be modified to meet the needs of an individual project or to satisfy the requirements of a particular client.
Digital contracting lets you handle complex contract negotiations within a single system. Whether you are doing a small project or ongoing projects for multiple clients, this saves you a great deal of time and money by streamlining your contract management lifecycle.
Managing time and materials contracts
Companies that use time and materials contracts need to track their hours, billable rates, and material markup rates. They need to be able to manage the complex data of a project and compare it to the contractual terms of a particular agreement. Ironclad’s contract management software provides you with actionable contract data reporting to let you stay on top of high volumes of agreements.
You can move contracts to close faster and visualize contract processing with easy-to-read visuals and data reporting. The software also provides you a way to store agreements in the Dynamic Repository, giving you access to vital information like:
- Terms and conditions of the contract
- Workflow suggestions
- Start and end dates for contracts
- Template and automation suggestions
- Party information
- Material markup rates and labor rates
- Limitations on projects
Why time and materials contracts can be time-consuming and hard to keep track of
Time and materials contracts are often unique to each client. This changing information should be easily ascertainable if you use modern contract management software, as compared to antiquated storage methods. You can create template agreements that save time in contracting with new and existing clients.
Automating workflows for time and materials contracts
Ironclad’s Workflow Designer gives you the power to automate your time and materials contracts. Automation can streamline your contracting time by 80% or more, letting you focus on revenue-generating projects rather than time-consuming contract negotiation.
Why time and materials contracts are hard to manage
Too many companies use out-of-date contract management procedures and software. These systems cannot communicate with one another and can cause a backlog in contract negotiations. The right software gives you tools that help you store, analyze, and manage your time and materials contracts.
The solution to your time and materials contract needs
Ironclad’s digital contract management software lets you automate your processes and manage template agreements. You get access to important tools that can help you create time and materials contracts that meet your specific business needs. These tools include:
Why use digital contract management for time and materials contracts?
Time and materials contracts are often complicated by hard-to-use software or paper record retention processes. Without the right technology, they can be difficult to manage and severely limited in how they can help your company improve its revenue. The right software lets you take advantage of the benefits of time and materials contracts and reduce their limitations.
Try a free demo of Ironclad now to start automating your time and materials contracts.
- What is a time and materials contract?
- Examples of a time and materials contract
- The purpose of a time and materials contract
- When do I need a time and materials contract?
- Parts of a time and materials contract
- Limitations of a time and materials contract
- How to create a time and materials contract
- Managing time and materials contracts
- The solution to your time and materials contract needs
- Why use digital contract management for time and materials contracts?
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Ironclad is not a law firm, and this post does not constitute or contain legal advice. To evaluate the accuracy, sufficiency, or reliability of the ideas and guidance reflected here, or the applicability of these materials to your business, you should consult with a licensed attorney. Use of and access to any of the resources contained within Ironclad’s site do not create an attorney-client relationship between the user and Ironclad.