There are several different types of pricing structures used in the construction industry, but one of the most controversial is the time and materials contract. Here is a brief explanation of what they involve and why time and materials contracts for home remodelers can put these companies at a disadvantage.
What are Time and Materials Contracts?
Time and materials contracts, sometimes called T&M or cost plus contracts, provide high levels of visibility and transparency in the contracting and billing process. The customer pays for the cost of materials installed and the labor required for the job. This is the “cost” part. The customer also pays an agreed-upon amount for the construction company’s overhead and profits. This is the “plus” element of the contract.
Unlike customers with other types of contracts, T&M clients are permitted to see invoices from vendors and subcontractors and can inspect employee timesheets if desired. Customers often believe that T&M contracts protect them significantly since they pay only for what they get and they can check invoices and timesheets to ensure to extra costs have been assessed.
Disadvantages of Time and Materials Contracts
Despite their apparent appeal, T&M contracts can impose several disadvantages on customers, bidders, and contractors.
- Contractors may not understand the details of accounting in a construction context. They may bill haphazardly and infrequently. They may not have a good grasp of important concepts such as markup and margin.
- Contractors who agree to T&M contracts may be under cash flow stress and need to get the job started quickly.
- Contractors who use T&M contracts are often newer or inexperienced businesspeople who may not have substantial amounts of time in the industry.
- Contractors may find themselves with huge expenses at the end of a project that cannot be collected because of the terms of a T&M contract.
Construction Monitor helps construction industry professionals recognize the factors that will have the greatest effect on their businesses. Contact us today for more information on the disadvantages of time and materials contracts for home remodelers and what pricing structures are more favorable for both new and established construction companies.