Time and Materials (T&M) Contract: Key Clauses, Pros & Cons

A time and materials (T&M) contract is a construction agreement where the project owner pays for actual labor hours worked, materials used, and a contractor’s markup. This makes them ideal for jobs where the scope of work is uncertain or where unexpected changes are likely.

In this article, we’ll break down how T&M contracts work, when to use them, and their key clauses to ensure they’re used effectively in construction projects.

What is Time and Materials Contracts in Construction

Time and materials construction contracts provide a flexible way to handle projects where costs are uncertain. Instead of agreeing on a fixed-price upfront like in a lump sum contract, the contractor is compensated based on the actual hours worked and materials used, along with a predetermined markup to cover overhead and profit. This structure ensures that contractors are paid fairly for unpredictable work while allowing clients to track real expenses.

That said, T&M contracts don’t mean an open-ended budget. While costs fluctuate based on project needs, both parties typically start with a rough estimate based on the known scope of work. To avoid uncontrolled spending, many contracts include a not-to-exceed (NTE) clause, which sets a financial limit the contractor cannot exceed without prior approval. This helps clients manage their budgets while giving contractors a framework for cost control.

For a deeper understanding of contract types, check out this guide on Construction Contracts.

What’s Included in a Time and Materials Contract?

A Time and Materials (T&M) contract is built on two key cost components: Time and Materials. Understanding how each is calculated helps both contractors and clients manage costs effectively.

• Time refers to labor hours worked, multiplied by a set hourly or daily rate. This includes not just wages but also overhead, indirect costs, and profit markup. For example, if a carpenter works 10 hours at $50 per hour, the labor cost for that work is $500.
• Materials cover the actual cost of physical resources used in the project. This includes unit-based pricing, such as the cost per meter of steel, per cubic meter of concrete, or per brick used. For example, if 500 bricks at $2 each are needed, the material cost for bricks is $1,000.

These costs are tracked throughout the project, with contractors submitting detailed invoices showing labor hours, material quantities, and applicable markups. This transparency allows clients to see exactly where their money is going and adjust the project scope if needed.

Time and Materials Contract Example

A well-structured T&M contract ensures transparency and flexibility while protecting both parties from disputes. It typically includes key elements such as scope of work, labor rates, material costs, payment terms, and a not-to-exceed (NTE) clause to control spending.

To ensure smooth execution, the contractor should provide detailed invoices with labor hours, material receipts, and cost reports, while the client should review and approve payments promptly. Both parties should also agree on insurance coverage, liability limitations, and communication protocols.

In the next section, we'll break down the key clauses that make up a strong T&M contract, ensuring both contractors and clients have a clear framework for managing costs and responsibilities.

Key Clauses in a Time and Materials (T&M) Contract

A Time and Materials contract provides a structured yet flexible agreement that ensures contractors are compensated fairly while clients maintain control over costs. To avoid disputes and ambiguities, these contracts must include well-defined clauses that cover everything from pricing to dispute resolution.

Below are the essential clauses that make up a solid T&M contract, along with an in-depth look at their purpose and function.

1. Scope of Work Clause

While T&M contracts allow for flexibility, defining a clear scope of work prevents misunderstandings. This clause outlines:

• The nature of the work to be performed (e.g., general construction, specialized trade work, consulting).
• Expected deliverables and milestones if applicable.
• Any known limitations or exclusions, such as materials or services not covered under the agreement.

Even if the scope evolves, having an initial framework ensures both parties align on expectations. This clause also provides a reference point for change orders, ensuring additional work is documented and approved.

2. Labor Rates Clause

This clause establishes how labor costs are calculated and paid. It should:

• Define hourly or daily rates for different roles (e.g., laborers, foremen, project managers).
• Specify overtime and holiday pay rates if applicable.
• Include subcontractor costs if they are billed separately.

Since labor is one of the most significant costs in construction, a well-defined labor rates clause prevents billing disputes and ensures transparency in payroll. Clients should also verify whether rates include or exclude benefits, taxes, and overhead costs to avoid unexpected markups.

3. Materials Cost Clause

This section governs how materials are procured, billed, and reimbursed. Contractors typically purchase materials on behalf of the client, and this clause must clarify:

• Whether reimbursement is based on actual purchase price or an estimated rate.
• If markups apply, including percentage limits (often between 10%-30%).
• Responsibility for freight, storage, handling fees, and applicable taxes.

A strong materials clause prevents cost inflation disputes and ensures clients are not overcharged. Some contracts may also require itemized receipts for transparency in billing.

4. Not-to-Exceed (NTE) Clause

An NTE clause protects clients from runaway costs by setting a maximum limit that the contractor cannot exceed without written approval. It typically includes:

• The total budget cap based on initial cost estimates.
• A process for requesting additional funds if unforeseen conditions arise.
• Consequences if the contractor fails to adhere to the budget, such as a requirement to complete work at their own expense.

This clause provides financial security for clients while allowing flexibility for necessary cost adjustments. It also encourages efficient project management by motivating contractors to stay within budget.

5. Change Order Clause

Construction projects often encounter scope changes, whether due to client requests, design modifications, or unexpected site conditions. A change order clause:

• Establishes a formal process for approving additional work.
• Defines how cost adjustments are calculated, including new labor/material rates.
• Sets expectations for timeline extensions resulting from changes.

Without a clear process, disagreements over unauthorized work and unexpected costs can lead to disputes. Having a structured approach ensures that both parties sign off on extra expenses before work begins.

6. Payment Terms Clause

This clause specifies how and when payments are made, ensuring smooth cash flow. It includes:

• Billing frequency (weekly, bi-weekly, or monthly).
• Accepted payment methods (bank transfer, check, escrow).
• Late payment penalties or interest rates on overdue invoices.

Some contracts include a retainage clause, where a percentage of the payment is withheld until final approval. This protects clients from incomplete work while ensuring contractors receive payment as work progresses.

7. Record-Keeping and Reporting Clause

Since T&M contracts require tracking actual labor hours and materials used, this clause outlines the contractor’s responsibilities for documentation. It typically requires:

• Daily logs or time sheets recording labor hours per worker.
• Receipts and invoices for all materials purchased.
• Periodic cost reports (weekly or monthly) summarizing expenditures.

Clients often request digital tracking systems or construction management software to automate this process. Keeping detailed records protects both parties from billing disputes and ensures compliance with the contract terms.

8. Termination Clause

A well-drafted termination clause provides a clear exit strategy if either party needs to end the contract early. It should cover:

• Conditions for termination, such as breach of contract, non-payment, or project delays.
• Notice requirements, such as 15 to 30 days’ written notice before termination.
• Financial obligations, including payment for completed work and unused materials.

By defining how costs are settled upon termination, this clause prevents legal battles and ensures a fair resolution if the project is canceled.

9. Dispute Resolution Clause

Since construction projects often involve unexpected costs, delays, or contract disagreements, this clause outlines the process for resolving disputes. It should include:

• Preferred method of resolution, such as mediation, arbitration, or litigation.
• Jurisdiction and governing laws, specifying which state or legal framework applies.
• Escalation process, from informal negotiations to formal legal proceedings.

Mediation and arbitration are often preferred over litigation because they are faster and less expensive. Having this clause in place ensures both parties know their rights and responsibilities before conflicts arise.

10. Disclaimers Clause

A T&M contract should also include disclaimers that limit liability and clarify expectations for both parties. Depending on the project, disclaimers may address:

• Material quality responsibility, stating that contractors are not liable for defects in client-selected materials
• No guaranteed completion date, acknowledging the unpredictable nature of construction
• Potential price fluctuations, especially for raw materials and transportation costs
• Communication responsibilities, ensuring both parties share updates and approvals in a timely manner

Disclaimers help prevent unrealistic expectations and ensure both parties understand their risks before work begins.

Pros and Cons of Time and Materials Contracts

A Time and Materials (T&M) contract offers flexibility but also comes with challenges. Whether it’s the right choice depends on the nature of your project, budget priorities, and risk tolerance. Here’s a quick look at the key benefits and drawbacks.

Advantages of a Time and Materials Contract

T&M contracts work well when project details are uncertain, allowing adjustments as needed.

• Adaptability – Ideal for projects with evolving requirements, such as renovations or emergency work. Adjustments can be made without renegotiating the entire contract.
• Cost Transparency – Clients see exactly what they’re paying for, with a breakdown of labor and material costs. This prevents unexpected markups.
• Fair Compensation for Contractors – Contractors are paid for actual work performed, reducing the risk of financial loss due to inaccurate estimates.
• Faster Project Start – Since a detailed budget isn’t required upfront, work can begin quickly, avoiding delays in urgent situations.

Disadvantages of a Time and Materials Contract

While flexible, T&M contracts require careful oversight to prevent budget overruns.

• Uncertain Total Costs – Without a fixed price, final expenses remain unknown until the project is complete. Budget controls like not-to-exceed clauses are essential.
• More Administrative Work – Contractors must track labor hours and material purchases in detail, while clients need to review and approve costs regularly.
• Potential Billing Disputes – Clients may question labor efficiency or material expenses, leading to disagreements. Clear documentation and open communication help prevent conflicts.

When Should You Use a Time and Materials Contract?

T&M contracts are best suited for projects where the scope isn’t fully defined or where conditions could change as work progresses. They’re commonly used:

• For renovations or repairs where unexpected issues might arise.
• When working with specialty contractors who require flexibility in their pricing.
• For emergency projects where quick action is needed, and detailed estimates are impossible upfront.

Since these contracts shift cost risks away from contractors, they are often easier to negotiate than fixed-price agreements. Contractors know they will be reimbursed for actual costs, making it less risky to take on complex or evolving projects. At the same time, clients benefit from real-time cost tracking and greater control over spending.

To ensure smooth execution, contractors using a T&M contract typically:

1. Calculate Labor Rates – Setting a clear rate that includes wages, indirect costs, and markup.
2. Estimate Materials Needs – Accounting for material costs, delivery fees, and markup.
3. Provide an Initial Budget Estimate – Giving project owners a realistic view of expected costs while maintaining flexibility for adjustments.

One of the biggest advantages of T&M contracts is that they are straightforward to negotiate, especially for contractors. Since they are reimbursed for actual costs throughout the project, financial risks are significantly lower compared to fixed-price contracts.

If project conditions shift or the scope changes mid-construction, contractors can adjust estimates and communicate updates to project owners, ensuring transparency and financial alignment.

Final Thoughts

Time and Materials (T&M) contracts offer a flexible approach to construction projects where uncertainty is a factor. By compensating contractors for actual labor and materials used, these agreements provide transparency and adaptability. However, to prevent budget overruns and disputes, it’s essential to include key clauses such as not-to-exceed limits, change order procedures, and clear payment terms.

For project owners, a T&M contract offers real-time cost tracking and control, while contractors benefit from fair compensation for unpredictable work. With proper oversight and documentation, this contract type can be an effective tool for managing complex or evolving construction projects.