Time and Materials Contracts in Construction

Complex projects like commercial construction and home renovations can be difficult to scope. This is especially challenging when it comes to determining the cost for time and materials.

In these situations, a time and materials contract can be a solution that helps both contractor and client feel secure in the face of uncertainty. Read on to learn more about what time and material contracts are, what is typically included, and how these contracts can be managed electronically.

This blog post is offered for general information purposes only. It does not constitute, and is not a substitute for, legal advice.

What is a time and materials contract?

A time and materials contract is an agreement between a contractor and their client that establishes a set hourly rate and the amount to be paid for materials. It may also include a cap for the total project cost to provide a safeguard for the client against cost overruns.

This type of contract is most commonly used for construction projects, which have a well earned reputation for uncertainty. However, time and materials contracts are well suited to any project where the scope and costs are not yet known when the contract is signed.

Time and materials contracts are generally used as a replacement for project estimates and fixed cost contracts. Project estimates put more risk on the client due to the fact that an estimate is not an enforceable cap on a project’s cost, while fixed cost contracts put more risk on the contractor if time and materials are more expensive than anticipated. 

What to include in a time and materials contract

Time and materials contracts primarily outline the various costs associated with a project so that both parties can agree on the scope of work and payment. These sections are not an exhaustive list of what to include in a time and materials contract. However, they represent the foundational content contained within this specific type of contract. For more detail about what to include in a contract, see our guide, How to Draft Contracts and Forms.

Hourly rate for labor

The hourly rate is divided by type of labor being performed. This section will also contain an upper cap for how much the client will pay regardless of how far over the estimate the price goes. Similarly, it may include a bonus for the project being finished early or significantly under budget. 

Cost for materials

This amount generally includes the cost of materials themselves, associated shipping costs, and any other costs for sourcing and ordering the materials. A contractor may include an extra percentage as a markup to cover other administrative costs and to help ensure profitability of the project.

A client may also have the option of saving money on materials by opting to source and order materials on their own. The risk to the client with this approach is that the materials may not arrive on time if the client does not order them soon enough, which may delay the project. 

Payment schedule

In addition to how much a project will cost, it is necessary to establish when the contractor will be paid. Typical time and materials contracts will have an initial payment so the contractor can purchase materials, which is due before work begins.

Subsequent payments are often set either on a monthly cadence or based on project milestones, such as when the project is one quarter, half, three quarters, and fully completed. Final payment is generally due when both parties agree that the terms of completion have been met. 

Terms of completion 

There are many situations where a client and contractor may disagree on whether or not a project has been completed—or completed to satisfaction. This should be agreed to before the contract is signed. 

Manage time and materials contracts digitally

Whether an organization’s time and materials contracts are limited to a few each year or hundreds of contracts a month, it is important to manage each contract properly.

With a contract lifecycle management (CLM) technology, you can generate, negotiate, sign and store your time and materials contracts in a single, centralized system. And when it’s time to access past contracts—whether they are months or years old—a digital CLM enables quick and easy search of the entire digital contract archives.

To learn more about how to use a digital CLM, see our guide A Quick Guide to CLM Best Practices.

Docusign has the tools you need to draft, negotiate and electronically sign your contracts. To get started, sign up for a Docusign free trial.