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Time & Material Contracts (Cost Plus)

Time and materials is a standard phrase in a contract for construction, product development or any other piece of work in which the employer agrees to pay the contractor based upon the time spent by the contractor's employees and subcontractors employees to perform the work, and for materials used in the construction (plus the contractor's mark up), no matter how much work is required to complete construction. Time and Materials is generally used in projects in which it is not possible to accurately estimate the size of the project, or when it is expected that the project requirements would most likely change.

Types of Analyses

These points are applicable to all general contractors and most specialty contractors in the construction industry:

  • There is no universal definition of Cost Plus or Time & Material Contracts or billing, thus creating confusion and misunderstandings almost immediately in any contract.
  • Lenders often will not lend on Cost Plus or Time & Material jobs unless there is a not to exceed clause.
  • Some states now have laws that specifically prohibit the use of Cost Plus contracts. (Be sure and Check!)
  • The risk of litigation or arbitration is high.
  • Cost Plus or Time & Material contracts are an easy way out of doing detailed project study and estimating.
  • Because of the perception that on Cost Plus or Time & Material contracts the Owner is required to pay for absolutely everything. This is not True.
  • Owners often go into a Cost Plus contract thinking they have ample money to cover the job. When the job reaches the 60% to 80% completion point, and the owners have made multiple changes to the job increasing the cost, they run out of money. Major risk!
  • For your own protection, you must keep an accurate day to day log of all labor, materials, sub-contract and other fees or costs on the job to be able to verify your actual expenses to date. With ample substantiation!
  • This is a documentation project in all respects.
  • Who draws the plans and gets the permits on a Cost Plus or Time & Material job? If a mistake is made on the plans, who pays for the time it takes to redraw the plans, and who pays to tear out the mistake and rebuild it?
  • Who pays for the Engineering if the Owner forgets to include it on the plans that they provide, and who pays for your down time while you wait for these revisions?
  • Suppose Engineering on a portion of the job gets by the plans examiner, the inspector catches the problem, and the job has to shut down until the engineering is complete and new plans drawn and ready to use. Who pays for the new plans & delays? Who pays for tearing out the wrong structural work completed and the materials that are ruined due to tear out? Who pays for the additional labor needed to correct the problem? Who pays for the down time for you and your crew, driving time, re-start up time?
  • If you make a mistake on a Cost Plus or Time & Material job, who pays for it? All of it!
  • What about Owner supplied materials. Who pays for all of the possible problems?
  • Owner expects you to be fully productive on their jobs for 8 hours a day. They will be looking over your shoulder constantly. You will seldom if ever get the job done as quickly as they are expecting you to do it.
  • Contractor must be far more diligent in policing employees so that they are productive on the job at all times, with no miscellaneous discussions or activities on or about anything other than the job they are working on.
  • It is very difficult to "compete" on Cost Plus commercial jobs because larger construction companies will take these jobs at cost, to build presence with corporations that allocate the multi-million dollar projects on assignment basis because of favorable past performance.
  • From the customer's standpoint, Cost Plus contracts give the contractor little incentive to get in and get the job done.

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Contributor

James G. Zack, Jr.
Executive Director
Navigant Construction Forum,
Navigant Consulting, Inc.
Website

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