A KPMG report estimates that around 70% of agile projects are contracted through the straightforward time and materials contract. They are best for environments where the project scope remains unclear or evolves.
This blog explores what they are made of, pros and cons, use cases, alternatives, and tips to manage them best.
Let’s dive in.
What is a time and materials contract, anyway?
A time and materials contract bills clients for direct labor hours plus the cost of materials at specified pricing structures. This type of contract is very suitable for agile project situations that are low risk and specified fixed hourly rates can be anticipated.
They are best suited for construction projects where deliverables are directly linked to resources’ time, direct materials, material handling costs, and acceptable standards.
| Pros | Cons |
 High flexibility: Allows for scope adjustments without the need to anticipate costs |  Customers own risk: The client typically assumes risk for subpar quality or underperformance |
| Supplier working under customer direction: Enables close collaboration and real-time adjustments on the entire project | Potential efficiency concerns: Suppliers may be incentivized to sell time rather than deliver optimal outcomes |
| Trust-based partnership: Relies heavily on trust between customer and delivery partner, fostering transparent relationships | Budget uncertainty: Final costs can exceed initial estimates without proper controls |
To address these concerns, many procurement experts recommend setting a ceiling price per sprint, which fairly limits customer risk. But some sources advise against this model entirely, arguing it may discourage suppliers from making accurate estimates.
For teams seeking different approaches to agile contract management, consider fixed-price sprints or outcome-based contracts. Each model offers specific benefits for different scenarios.
Let’s get down to some of the most common use cases.
When do time and materials contracts work?
1. For projects without a clear finish line
Time and materials contracts are best for scenarios where project requirements are fluid or uncertain. Software development projects, research initiatives, or complex integrations often benefit from T&M structures.
2. When you need to start quickly
Rapid market entry and competitive pressures sometimes demand a bias for action. T&M contracts enable teams to begin agile projects as requirements crystallize.
3. For long-term projects with changing requirements
Extended engagements spanning months or years usually experience shifting priorities, technology updates, or regulatory changes. T&M contracts provide the flexibility to adapt without renegotiating fundamental contract terms.
When T&M does not make sense
Consider alternative contracting models when:
- Project scope is well-defined and unlikely to change
- Budget certainty is paramount
- Deliverables can be clearly specified upfront
- Historical data enables accurate cost estimation
- Risk tolerance is minimal, and cost control is necessary
Typically, the way to source Agile is through Time and Materials (T&M). However, the problem with T&M is that when something goes wrong, we need to take full responsibility, and there is little incentive for our partners to improve or optimise.
I want our partners to have ‘skin in the game’, a shared responsibility for a good outcome, but also give them the chance to innovate, so we are all winners. That is why we developed a way with KPMG to procure Agile development sprints at a fixed cost base.
Organizations must carefully evaluate their specific circumstances, risk tolerance, and project characteristics to determine whether T&M contracts align with their strategic objectives and operational requirements.
The big debate: Time and materials vs. fixed-price contracts
The fundamental distinction between time and materials and fixed-price contracts centers on risk allocation and adaptability. T&M contracts transfer budget risk to the client while providing maximum price flexibility for scope changes. Fixed-price contracts offer budget certainty but require comprehensive upfront planning and limit adaptation to changing requirements.
Which one is right for your project? A quick comparison
| Factor | T&M | Fixed-Price | Cost-Plus |
| Budget Predictability | Low | High | Medium |
| Scope Flexibility | High | Low | High |
| Risk Distribution | Client | Supplier | Shared |
| Admin Complexity | Medium | Low | High |
| Best Use Case | Agile/Uncertain | Defined Scope | Reimbursable |
Other common construction contracts include integrated project delivery, design-build contract, cost plus contract, guaranteed maximum price, lump-sum, unit price, incentive-based, and AIA contracts.
Choose from them based on project needs, organizational risk tolerance, and strategic objectives.
What should be in your time and materials agreement?
Research indicates that 85% of scopes are written by buyers who are trying to translate sales language into a compatible SOW, while only 15% are written by actual buyers. This disconnect underscores the importance of clear, focused contract language that defines resources, seniority, commercial services, core deliverables, and acceptance criteria.
Drafting focused contracts
Instead of getting lost in legal minutiae, rethink the following:
- Tools: Use AI tools to clean up language, identify inconsistencies, and streamline SOWs
- Focus: Trim lengthy, complex documents toward lighter, more focused SOWs
- Frameworks: Create frameworks that allow for evolving project needs while maintaining clear delivery expectations
- Training: Develop comprehensive learning modules for clear, outcome-focused SOW writing across sectors
Define the labor and labor costs
Successful T&M contracts specify detailed labor rate structures that account for different skill levels, seniority, and specialized expertise. If various types of professionals will perform work, specify hourly or daily rates for each category. Account for inflation over extended contract periods with advance notice requirements for rate increases.
For organizations managing high-volume contract portfolios, automated rate tracking becomes essential. As demonstrated in our work with LeadSquared, where legal teams process 180-250 contracts monthly, contract lifecycle management platforms can reduce manual oversight burden.
Tracking the goods
Material cost structures require transparency and cost control mechanisms. Define whether materials will be at cost, cost-plus percentage, or predetermined rates. Establish approval standards and documentation protocols.
Successful implementations often integrate material tracking with existing procurement systems. Organizations like Qapita have leveraged automated metadata extraction to track material costs and contract obligations across their 2,400+ client portfolio, demonstrating how technology can streamline material cost management.
The safety net
A not-to-exceed (NTE) clause sets maximum spending limits while preserving T&M flexibility. This approach offers T&M adaptability with fixed-price or lump sum contract budget protection. NTE clauses should specify:
- Maximum total contract value
- Procedures for NTE modifications
- Approval requirements for approaching limits
- Consequences of exceeding limits without authorization
Payment terms and billing cycles
Clear payment terms define billing frequency (weekly, monthly, quarterly) and specify documentation requirements for invoice processing. The payment trigger typically occurs upon receipt of invoices detailing billable hours and itemized expenses.
For organizations processing substantial contract volumes, automated billing workflows become essential. Teams managing hundreds of such simple contracts monthly benefit from integrated systems that track billable hours, validate rates, and generate compliant invoicing documentation.
Essential Contract Details to Include
- Labor Categories: Define specific roles and corresponding rates
- Rate Hikes: Specify inflation adjustments and notice periods
- Material Handling: Establish markup structures and approval thresholds
- Billing Frequency: Define reporting cycles and documentation requirements
- Exception Triggers: Clarify when T&M applies versus standard billing
- Pre-approval Requirements: Specify circumstances requiring customer approval
Tips for managing your T&M contract successfully
1. Set expectations from the outset
Successful T&M contract management begins with a comprehensive expectation setting that covers scope boundaries, communication protocols, and contractor performance metrics. Define deliverable quality standards, timeline expectations, and dispute resolution terms before work starts.
Organizations processing high contract volumes, like those managing 1000+ contracts as seen with LeadSquared, benefit from standardized expectation frameworks that ensure consistency across engagements while accommodating project-specific requirements.
2. Communicate openly and regularly
Establish weekly or bi-weekly check-ins that monitor progress, budgets, and scope. Successful implementations involve teams using vendor contract management platforms for centralized contract data, better collaboration, and reduced administrative overhead.
3. Use a CLM for time and materials contracts
Contract lifecycle management platforms automate obligation tracking and provide real-time visibility into contract performance.
Organizations leveraging comprehensive CLM solutions report significant efficiency gains in different contract stages. Teams using AI-powered contract review capabilities can reduce review time from 4-6 hours to under 2 hours, while AI obligation tracking ensures no critical deadlines are missed.
Modern CLM platforms integrate seamlessly with existing business systems like procurement, finance, and project management tools. This integration eliminates context switching and provides unified visibility into contract performance across the organization.
The combination of clear processes, regular communication, and robust technology infrastructure positions you to maximize T&M contract value while minimizing risks and administrative costs.
Streamline your T&M contract management
See how HyperStart can simplify your entire contract lifecycle, from drafting T&M agreements to obligation tracking.
Book a DemoWrapping up
Organizations succeeding with T&M contracts typically combine clear contractual relationship management, collaborative planning, and technology solutions that organically connect with their existing processes.
Make the most of your construction contract management today. Book a demo.
