The Ins and Outs of Time and Materials Agreements
A time and materials agreement is a contract that allows a contractor to bill for labor and material used to complete a project or a portion of a project. It is most often a post-award contract but can sometimes even be the basis for a firm fixed price contract where the contractor and the government could not agree on a price l during negotiations and have agreed to perform the work on a time and materials basis. With a T&M contract, the contractor is employee are entitled to be compensated for the time it takes, at an agreed upon hourly rate, for the work to be performed over the stated length of the contract. With a time and materials contract , labor can be charged on an hourly basis or a set per diem rate (which is typically a flat rate for a single day’s work). Material costs are typically billed at cost plus a set percentage for profit. The purpose and underlying rationale for a T&M contract is to provide the means for the contractor to recover the costs related to changes without there being a formal change order.
These agreements are normally utilized where the scope of the work cannot be determined in advance with any degree of precision, such as in the case of repairing or replacing leaking pipes under a site using a tunneling machine. The parties may also agree to a T&M agreement to provide guidance or to limit the cost of a run for specific work, such as flying three personnel into a remote location to perform a nature relationship assessment. The advantages of a time and materials agreement are potentially significant: The government never has to pay more than the contract ceiling price. However, the contractor is only carried for its true cost and is not carrying the risk associated with any cost increases in the event of a change.
Key Elements of a Time and Materials Template
A time and materials agreement template usually consists of several important elements that will form the basis of the timeline and budget for the project. The details outlined in this document will dictate exactly how the worker is to perform the tasks, who will oversee them, and how the work will be billed. Here are some of the most important components you need to make sure are covered in the agreement:
Scope of Work
The details of the scope are outlined in the agreement, including the specific tasks to be completed, the service provider’s hours, materials to be used, how parts should be sourced, and pricing for all of the items.
Hours
The hours of operation that are tasked to the job should be included. For example, if you have a worker who is supposed to come in only during set business hours as specified in the contract, they need to know that. Unless otherwise stated, the expectation from the worker may be that the hours will be more flexible. Specify whether they can work evenings or weekends, or if the work must be done exclusively during normal business hours.
Time Tracking
Whether the workers have to clock in or report to a direct supervisor each day, you need to clearly indicate where files should be turned in and what method you expect them to use to track their hours. From phone apps to online portals, if you expect your workers to use a specific service to track their time on the job, indicate it in the agreement so that there is no confusion.
Material Costs
In some cases, the worker will be responsible for obtaining their own materials. If that is the case, determine how it will be billed and what the expected costs will be. If possible, obtain estimates on all products and services beforehand.
Some factors might not necessarily require their own line in the agreement, but still need to be clear so there are no complications down the road. Payments, for instance, should detail how and when the worker will be paid. If they are using hourly or project-based pay, that needs to be specified. It’s also good to include information on audits or inspections, confidentiality agreements, licensing, and any other details that help the worker know exactly what is expected of them. Even the most basic, one-page agreement can include these simple details.
Creating a Winning Agreement
A time and materials agreement can be drafted in a few steps. Some ideas for drafting a clear and effective time and materials agreement include:
- (1) Clear Title: Clearly stating at the top of your time and materials contract template that the contract is a time and materials contract will automatically set the tone for such. For example, you can title your time and materials contract template as "Time and Materials Agreement" or "Hourly Rate Agreement."
- (2) Definition of Deliverables: Carefully define what tasks constitute "work". Time and materials agreements can run into problems when they do not clearly delineate what work is to be performed as opposed to tasks that encompass regular project management. Be specific yet broad enough so that work that needs to be performed can easily be included.
- (3) Clear Payment Terms: Clearly delineate how and when payments are to be made to the hourly worker.
- (4) Include Termination clause: State that Either party may terminate this agreement at any time with [insert reasonable notice such as seven (7) days]. As this section can be important to allow for a graceful exit if the work is not satisfactory, be sure to hit up this section with great care.
Typical Issues and Resolutions
Time and materials agreements, by their very nature, can present a number of challenges in the course of a project, most notably cost overruns and scope creep. Successful project management requires diligence in anticipating and resolving these problems as they arise.
Cost Overruns
In a time and materials agreement, the total cost of the work cannot be accurately predicted because it is based on actual expenditures of labor and materials. This creates an inherent risk for both project owners and contractors. If a contractor underestimates the amount of time or cost of labor required to complete the work, he or she is responsible for that additional cost. If an owner has not budgeted appropriately for the prospect of cost overruns, there could be budgetary issues over the course of the project. This could lead to disputes and delays in payment to the contractor, which would delay progress.
Scope Creep
When a contractor is hired on a time and materials basis, he or she may be tempted to interpret the scope of the work broadly and add extras that the owner did not require and for which the owner will be responsible. Due to the fluid nature of this type of agreement, a contractor may have difficulty requesting the owner’s consent before performing these extras, but the contractor is required to do so.
Preventing Problems
The risk of cost overruns and scope creep can be mitigated by:
• Clearly defining the scope of the work and further specifying what elements are included in the bid, using attachments containing conditions and exclusions.
• Establishing prior and required consent for extras with the owner, with a pre-approved formula for calculating the cost of the extras based on labor and materials.
• Including a representative or committee in the agreement to interpret the contract and scope of work, approve extras, assess progress, and certify that invoices are accurate.
One of the better ways to mitigate uncertainty in the extensive scope of a time and materials agreement is to initially set a ceiling on the contract price, and include a cap on labor at a defined hourly rate.
Legal and Regulatory Considerations
Alike performance bonds, Time and Materials agreements must reflect in the final documents two fundamental legal considerations applicable to all construction contracts. First is the "unconditional promise to pay", or the rule that if a contract is unambiguous, meaning the words are plain in meaning, it is enforceable without reference to any other agreement, oral or otherwise. The second is perhaps best stated as the "time is of the essence" rule, that is, the duty to timely perform under the contract. The first requirement means that unless specifically provided in the agreement, every Time and Materials contract requires an unconditional promise to pay against bond and/or contract proceeds. Generally, contractors respond to work as described in the general plans and specifications and typically do not include contingency or margin for errors and omissions in the work. The absence of sufficient money to pay a contractor or subcontractor for the work performed does not excuse performance. Even if there are more dollars available, such as in a lump-sum agreement, a contractor who has performed its work may require full payment in the event of a dispute. If a contractor is not satisfied with its lump-sum payout , charging against the bond may be the only recourse. Consequently, when a bond is issued in connection with a Time and Materials contract, the unconditional promise to pay must appear in the agreement. The same rule applies to proceeds. The second requirement is not overlooked, but qualified. Specifically, unless the agreement provides otherwise, time is of the essence in the performance of the terms and conditions stated in the agreement. As a result, parties requesting extensions of time must be prepared to meet their burden and anticipate that a default could result if performance is delayed without cause. A simple restatement of the facts in the subsequent pleadings may result in a denial, an award of delay damages, or worse, a forfeiture of the lien and bond rights. The ramifications can be extensive and as one case rules, "Punctual performance is an act the law will uphold. . . . A waiver of time of performance will not be lightly presumed." While it is important to ensure that the pre-printed language captures the unconditional promise to pay and time is of the essence, the omission of specific references regarding the bond and lien forms should be carefully considered in the drafting phase.
Adapting Your Template for Various Industries
The vast array of industries utilizing Time and Materials Agreements underscores the need for industry-specific templates. Although a fundamental understanding of the structure and potential liabilities associated with time and materials agreements is necessary, industry-specific templates can enhance productivity and reduce risk.
Construction – Time and materials agreements in the construction context are perhaps the most ubiquitous. Generally, construction projects are "time and materials" because the full scope of work to be performed may not be known at the outset, and/or there may be little or no discrete information available for bidding purposes. In other words, the contractor provides services on a time and materials basis when the customer is unable to review or value the service in advance because it is not possible to determine the full scope of work to be performed (and the also the timeliness expectations). Because general contractors and subcontractors often face complex and frequently changing safety and regulatory obligations, an industry-specific template focused on compliance with applicable regulations can be invaluable. Construction-standard templates should include language addressing notice requirements or limitations of liability, as construction contracts often incorporate notice or damage exclusions in their contracts with general contractors or subcontractors.
Information Technology – Similar in many respects to the construction industry, the information technology ("IT") sector generally operates in a "time and materials" fashion when the customer is unable to review or value the service in advance because it is not possible to determine the full scope of work to be performed. One difference between the construction industry and the IT sector is that the costs associated with providing an IT product or service may vary greatly based upon the size and experience of the vendor, and the urgency of the service provided. Further, unlike the construction industry, health, beauty or other consumer-focused contracts have not been found to be unconscionable based on the disparity of bargaining power of parties. Therefore, these contracts may not need to expressly address "fair pricing" representations.
Consulting – A consulting Time and Materials Agreement should account for scheduling flexibility, including timeframes during which the consultant can respond. Further, it should anticipate the varying needs of different industries, i.e., a consulting agreement to implement a new telecommunications system may have different requirements than a consulting agreement for a political strategy session. Contractual requirements and rights may be subject to state laws, such as Florida’s Wild Acorn v. Alachua Cty Board of County Commissioners holding that Florida’s notice statute protects every citizen from unreasonable governmental action, and further establishing a presumption that the entity seeking to take action that requires notice will bear the burden of proof to demonstrate that the benefits of the proposed action outweigh the burdens of a pre-award protest.
Technology’s Impact on Template Management
The rapid advancement of technology has had a tremendous impact on managing and executing time and materials agreements. With a plethora of digital tools and software becoming available, businesses can now more efficiently track time spent, costs incurred, and ensure compliance with the terms and conditions of the agreement.
Online portals that consolidate important details of various time and materials agreements in one place have been highly effective and have streamlined processes for accounts payable specialists and project managers alike. These portals can house information such as project proposals, schedules, and status updates, submitted invoices and change order requests , and all of the time spent by affiliates of the company performing under each agreement, among other things.
Software that automatically tracks time spent by employees or contractors on projects is also an increasingly popular way to efficiently capture records of time spent under time and materials agreements. Some of these systems even integrate with existing accounting software so time records can be accurately and easily reflected on invoices sent to the other parties to the agreements.
These digital tools simplify record keeping and make it easier than ever for a business to account for all time spent, costs incurred, and other information required for a time and materials agreement.