![]() With a time and materials contract, contractors mitigate their own risk with the assurance that a project will stay profitable even when it encounters roadblocks. All construction projects involve risks, unknown variables, delays, changes, and more. These clauses can create incentives for the general contractor to complete work in a timely manner and under budget - otherwise they’ll cut into their own profit margin.įor contractors, a T&M contract relieves the burden of creating a perfect estimate. That said, many time and materials contracts include “not-to-exceed” clauses that set a maximum price or a maximum number of labor hours. Contractors face the administrative challenge of tracking and submitting labor hours and material costs.įor many property owners, a T&M contract is less appealing than a fixed price contract because the total cost is unknown at the start of construction. Markup is built into both material and labor costs, so the GC knows their profit margin. Unless a “not-to-exceed” clause is built into the contract, owners face unknown and potentially high costs. Because the owner pays for actual costs, the GC can manage delays and changes. Notably, material and labor costs have several additional factors built in to the contract: This type of contract offers additional protection for contractors, who have greater assurance that their costs will be covered throughout the project. Time and materials contracts - also called T&M contracts - reimburse contractors for material costs and pay a fixed daily or hourly wage for labor costs. With a fixed total cost for the project, GCs who manage their costs during construction can end up with a robust profit margin. Lump sum contracts also benefit general contractors, especially those who create accurate estimates and bids. For that reason, many owners choose to hire a construction manager as their representative on the job site. Lump sum contracts are helpful for property owners during the bidding phase, but during construction, owners have to be mindful that the general contractors are incentivized to come in under budget. If contractors are not careful about managing costs, their profit margin can disappear. With fixed total costs, property owners can choose among bids with ease.Ĭosts can cut into profits. ![]() Since the final cost is set in stone, contractors may wish to cut corners in order to increase their profit margin.Įasily compare bids. A well-calculated bid can cover all project costs and leave a healthy profit margin. While lump sum contracts are extremely useful, they do have drawbacks. Lump sum contracts work especially well for projects with a well-defined scope of work, which enables contractors to make an accurate estimate of the project’s cost. This is the most basic and common type of construction contract. Lump sum contracts, also called fixed price contracts, establish a fixed price for all of the materials and labor required to complete a job. Ultimately, selecting the right contracts for your projects is an important part of construction financial management, since contracts directly affect your expenses, revenue, and profit. Understanding the risks and benefits of each contract type can help you make the best choice for your project. Reserved for projects with known scope and challenges.Ĭontractors are paid for project costs plus a predetermined profit margin.īeneficial for contractors on projects with many potential change orders. ![]() ![]() Useful for projects with an uncertain number of repeatable elements.Ĭontract sets an upper limit for costs, and the GC or construction manager absorbs additional costs. Work is divided into fixed cost units, and contractors bill for each unit separately. Helpful for projects with uncertain scope. Parties agree on a fixed price for the entire project or phase.īest for projects with a well-defined scope of work.Ĭontractors bill for all material costs and labor at an hourly rate.
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