The Comprehensive Knowledge of Time and Materials Contract

Initially, there was a tendency toward using a fixed-price model in outsourcing agreements. However, several different business models have emerged and are widely utilized, one of which is known as the Time and Materials contract (or T&M contract). Choosing the proper pricing contract can be a daunting task since it must be aligned with your company’s operating processes, requirements, and objectives, along with overhead costs borne by the vendor.

T&M and Fixed price are considered two dominant choices, and both have their different advantages and disadvantages. However, in today’s article, Sosene primarily focus on the T&M model and the main difference between these two models.

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What is Time and Materials Contract?

Time and Materials contract is roughly understood as the quantity of work you accomplish decides how much will be paid. It implies you must divide your project into small jobs and determine how much time each task demands. Besides, you must identify how many people are involved, what equipment is required, and any additional expenditures that may be appeared.

Time and Materials contract

Parts of a Time and Materials Contract

Any contract’s purpose is to fulfill project criteria, cover the expenses and overhead, and generate a profit for the contractor. Below are some fundamental elements you should include in your T&M contract:

Parts of Time and Materials contract

Labor rates: It should cover not just the employees’ and subcontractors’ hourly salaries but also the executives that supervise the project and invoices.
Maximum labor hours: A maximum number of labor hours can be classified to avoid runaway costs.
Materials markup: The business service will invoice for the actual cost of materials (consisting of freight and specified markup), which is often between 15% and 35%.
T&M NTE (Time and materials not-to-exceed clause): The entire project is perhaps included with a not-to-exceed quote so that the client can be aware of the maximum expense before work begins.
Payment milestones: In some circumstances, the agreed-upon milestones should be specified to sustain the contractor’s workflow.

When to use T&M contract:

It is suitable for long-term projects asking for dynamic needs.
The scope of work and durations are unable to be determined.
T&M contract is flexible, which is easier to vary the workloads and modify the scope.

The Advantages and Disadvantages of Time and Materials contract

1. The advantages of T&M Contract

Using the T&M model can provide many benefits. However, the below information only lists three main valuable pros that will be easy to recognize.

The Pros of Time and Materials contract

2. The disadvantages of Time and Materials contract

Some of the downsides of T&M contract that will be encountered are as follows:

The Cons of T&M contract

The differences between Time and Materials contract and Fixed price contract

Basically, in fixed price model, the contractor is responsible for estimating the fixed price for the whole project and taking on the risk of overruns. Meanwhile, in T&M contract, the clients will be charged for the material costs and fixed hourly rate. It also is the reason why the customers handle more risk in this model.

Here are some elements you should consider choosing out what method may suit your business demands.

The differences between T&M contract and Fixed price contract

Conclusion

When the size and timeframe of the project are unknown before the project starts, T&M contract usually works better than others. This model provides a profit for the contractor but increases the administrative burden about tracking time and expenses. Good accounting software, on the other hand, may automate much or all that extra work.

If you are searching for a software company that can satisfy your goals, Sosene is always here to support you. Sosene believes that bringing value to our customers is our mission, so please feel free to contact us. We would be delighted to assist you.