In the field of engineering and construction, T&M stands for Time and Materials contracts involving two parties. T&M contracts have a timeframe attached to them with an agreed price for labor and materials. T&M contracts are used when both parties cannot agree upon
- An accurate project cost estimate
- When project schedules cannot be determined
- When changes are likely in light of ever-changing internal or external factors
Although contracts place varying degrees of risk on clients and contractors, in the case of T&M, the client bears the highest risk compared to the degree of risk borne by the contractor. Not knowing how much a project will cost places the client into a cycle of uncertainty, so planning a budget becomes a challenge.
There is also T&E which stands for Time & Equipment. This is when the contract is for labor time and equipment (vehicles) time, where materials are provided by the customer.
Why is a T&M contract signed despite prevailing uncertainties?
Why will a client sign a T&M contract despite the uncertain nature of the entire arrangement? Why go through so much risk to complete a project? Well, the answer to both questions depends on the client’s motive. In general terms, this type of contract is signed if the project is very important to the client, and there is a need to push on without stopping work. The client bears the brunt of subtle or radical changes in project cost, but they are changes that the client is willing to absorb. This is especially the case when a natural disaster happens or new regulations are being required on the customer.
Contractual terms in T&M
There are quite a few components that make up T&M contracts. These components are negotiated by both parties (client and contractor) with all relevant statistics laid bare.
The Labor rate: The labor rate is one of the components of T&M contracts. Items to be negotiated in T&M contracts are the fixed labor cost and other administrative personnel costs.
Maximum Labor Hours: There is a maximum labor hour set under T&M contracts. A maximum amount of time is allotted for every single task. There is also a set clause that prevents contractors from exceeding the work hours already set in the contract. Exceeding the set time will not lead to an increase in wages to be paid by the client. This is typically set by a Maximum Purchase Order value.
Material Markup: Under this component, a percentage of material cost is set with a contingency plan markup price of between 15%-35% of the total material cost set aside. Should there be a rise in the price of materials at any particular time when the project is underway, the client disburses extra cash to make up for the rise in value. Some materials may be very difficult to source and require a larger margin, since sourcing material costs money.
Many clients are not used to working with T&M contracts, so it is rarely used. They prefer a fixed price or unit price contracts where they know beforehand just how much their building projects will cost. However, this is not always possible, but if they still wish to get the project underway, then a T&M contract is unavoidable. Although it places a lot of uncertainty on their budget, it still helps them immensely since it prevents potential disputes with contractors and subcontractors who may demand additional payments for work done or for materials supplied.
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