What is a Time and Materials (T&M) Contract?

In project management and construction, a Time and Materials (T&M) contract is an arrangement where the client agrees to pay the contractor based on the exact hours worked (Time) and the actual cost of supplies (Materials), rather than paying a flat, fixed price for the entire project.

T&M contracts are highly common in software development, construction, legal services, and general consulting where the full scope of work is difficult to accurately predict upfront.

Fixed Price vs. Time and Materials

• Fixed Price (Lump Sum): The contractor says "I will build this app for exactly $50,000." If it takes them 500 hours, they make a great profit. If it takes 2,000 hours, the contractor takes a massive loss. The risk is entirely on the contractor.
• Time and Materials: The contractor says "I will build this app for $150 per hour, plus the cost of software licenses." If the client requests changes, the price naturally scales. The risk is entirely on the client, as the final budget is not strictly capped.

Why Apply a Markup?

In standard T&M contracts, contractors do not simply pass through the exact cost of materials. They apply a Markup (often 10% to 25%). This markup covers un-billable overhead expenses related to procuring the materials:

• The time spent sourcing and negotiating with vendors.
• The cost of shipping, handling, and storage.
• The financial risk and carrying cost of purchasing materials upfront on company credit before the client pays the invoice.

Setting a "Not To Exceed" (NTE) Limit

Because T&M contracts pose a risk of runaway budgets for clients, it is standard practice to include a Not To Exceed (NTE) clause. This acts as a hybrid approach: the client pays hourly, but the total budget is hard-capped (e.g., "Billed at $150/hr, not to exceed $60,000 without written authorization").