Time and materials contract
T&M contract / time-and-materials contract / time and materials vs fixed price
A time and materials contract pays a supplier fixed hourly rates for the hours actually worked, plus the actual cost of materials. The buyer carries the risk of the work running long, so the total is open ended unless the contract sets a ceiling price that the supplier exceeds at its own risk.
The clearest definition in print comes from the Federal Acquisition Regulation, the rulebook federal agencies buy under. It describes paying for direct labor hours at fixed hourly rates that already include wages, overhead and profit, plus the actual cost of materials. Software and marketing proposals use the same name for the same arrangement.
Those federal rules treat it as a last resort. An agency may use one only when the extent or duration of the work cannot be estimated accurately at the start, and the contracting officer must document that no other contract type is suitable. The reason is stated plainly in the rule: the arrangement gives the contractor no positive profit incentive to control cost or work efficiently.
So the rules attach two protections. The contract must include a ceiling price that the contractor exceeds at its own risk, and the buyer has to watch the contractor's performance closely enough to be confident the hours are being spent efficiently. Those are the two things to look for in any time and materials proposal: a cap, and a clear view of where the hours go.
In practice
A company wants a customer portal and gets two quotes. One is a fixed price of $48,000. The other is $150 an hour on an estimate of 300 hours, which is $45,000, with no ceiling. If the build takes 400 hours, the second quote comes to $60,000, and the extra $15,000 falls on the buyer. With a $50,000 ceiling written in, the supplier would carry the last $10,000. The figures are a worked example.
Not the same as
- Firm fixed price contract
- A firm fixed price contract sets a price that does not change with what the work actually costs the supplier, which puts the maximum risk on the supplier. A time and materials contract puts the cost of extra hours on the buyer.
Why it matters to you
Time and materials suits work nobody can scope yet, such as untangling an old system before anyone knows what is inside it. For work that can be described in advance, it moves the cost of a slow or wrong estimate onto you. Ask for a ceiling price, regular hour reports by person, and a checkpoint where you can stop.
What to ask or check
- 01Is there a ceiling price, and who pays for hours beyond it?
- 02Which hourly rate applies to each person or role on the job?
- 03How often will hours be reported, and broken down by what?
- 04Could this work be quoted as a fixed price instead, and if not, why not?
What people get wrong
That the estimate in a time and materials quote is the price. The contract pays for hours actually worked, so the estimate binds nobody unless a ceiling price is written into it.
Red flags
- An hourly quote with an estimate of total hours and no ceiling price.
- Hours reported as one monthly total, with no breakdown by person or task.