Time and Materials Explained: Contracts, Billing, and Best Practices

Time and Materials (T&M) contracts let clients pay for the real work that gets done—based on the hours worked and the materials used—rather than a fixed project price. This approach works especially well when a project’s scope isn’t fully defined or is likely to change along the way, helping both sides stay flexible and bill fairly.

In this guide, we’ll explain how time and materials contracts work, when they make sense, their pros and cons, and best practices for tracking labor and materials accurately.

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

A time and materials contract is a billing arrangement where clients pay for two things: the actual time spent working on a project (billed at agreed hourly rates) and the actual cost of materials used, often with a markup.

Unlike fixed-price contracts, a T&M agreement doesn’t lock in a total cost upfront. Instead, the contractor and client agree on labor rates, how materials will be priced, and how billing will be documented. The final cost reflects what the project actually requires as work progresses.

In practical terms, a T&M contract prioritizes flexibility and transparency. It’s commonly used in construction, software development, consulting, maintenance, and repair work—any situation where it’s difficult to predict time and materials accurately in advance. This pricing model offers an alternative to fixed bid arrangements when project requirements remain uncertain.

Example

Think of taking your car to a mechanic. You pay an hourly labor rate plus the cost of parts. Since no one knows exactly how long the repair will take until the work is done, the final bill comes afterward. A time and materials contract works the same way.

How Do Time and Materials Contracts Work?

Understanding the workflow behind T&M contracts helps both contractors and clients manage expectations and avoid billing disputes.

Step 1: Establish rates and terms

Before work begins, both parties agree on key pricing details, such as:

• Hourly rates for each labor category
• How materials will be billed and marked up
• Billing frequency and payment terms
• Documentation requirements

For example:

• Senior project manager: $150/hour
• Licensed electrician: $95/hour
• Apprentice: $45/hour
• Equipment rental: $50/hour
• Materials markup: 15%

Step 2: Track time and materials as work happens

As work progresses, contractors track labor hours using time sheets, time tracking software, or mobile apps. Each entry should include who worked, what tasks were completed, and which labor category applies.

Materials are tracked at the same time, with receipts and documentation showing actual costs paid.

Step 3: Create itemized invoices

At each billing cycle, invoices typically include:

• Hours worked by each role
• Hourly rates and total labor costs
• Itemized material costs with markup
• Supporting documentation

Step 4: Client review and payment

The client reviews the invoice, verifies the hours and materials, and approves payment. While this level of transparency builds trust, it also requires accurate and consistent record-keeping.

When Should You Use a Time and Materials Contract?

Time and materials contracts work best in specific project situations where other contract types create problems or unfair risks.

Use T&M contracts when:

Project scope is unclear Renovations, repairs, or troubleshooting often reveal hidden issues once work begins.

Requirements are likely to change Software development and consulting projects evolve as clients see results and adjust priorities.

Work needs to start quickly T&M contracts allow projects to begin without waiting for a fully defined scope or estimates.

Tasks are specialized or unpredictable Emergency repairs, technical diagnostics, and custom work are hard to price accurately upfront.

Avoid T&M contracts when:

• Scope and requirements are clearly defined
• Clients require strict, fixed budgets
• You have enough experience to confidently price a fixed-fee job
• Clients can’t review or approve detailed invoices

Government Time and Materials Contracts

According to federal acquisition regulations, government time and materials contracts follow stricter rules than commercial agreements. They’re typically used only when agencies can’t define requirements well enough for fixed-price contracts.

These contracts often include labor hour ceilings, detailed reporting requirements, audit rights, and strict oversight to protect taxpayer funds. Government contractors must also follow specific payment requirements that ensure proper documentation and compliance. Contractors should expect significantly more documentation and compliance obligations than in private-sector T&M work.

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Pros & Cons of Time and Material Contracts

Time and materials contracts aren’t perfect for every situation. Like choosing between a fixed-price menu and paying by the plate at a restaurant, each approach has its trade-offs. Here’s what you need to know before committing.

The Advantages of T&M Contracts

Flexibility tops the list. When project requirements shift—and they often do—T&M contracts adapt without triggering expensive change orders or contract renegotiations. You can adjust the scope mid-project without starting from scratch.

For contractors, the billing structure is straightforward: you get paid for every hour worked and every material purchased. No need to pad estimates or worry about losing money on unexpected complications. For clients, the transparency can actually build trust. They see exactly where their money goes, with detailed breakdowns of time and materials.

Projects can also start faster. Instead of spending weeks perfecting a detailed estimate, you can begin work with a general scope and refine as you go.

The Disadvantages of T&M Contracts

The biggest concern for clients? Budget uncertainty. Without a fixed price, you won’t know the final cost until the work is done. This makes financial planning trickier, especially for businesses with tight budgets or projects requiring board approval.

The hourly billing structure can also create an efficiency problem. When contractors bill by the hour, there’s less financial incentive to work faster—though reputable professionals prioritize quality and client relationships over squeezing extra hours.

Finally, T&M contracts demand more administrative work from everyone. Contractors must track time meticulously, photograph materials, and document everything. Clients need to review and approve these records regularly. Skip the paperwork, and disputes become almost inevitable.

Quick Comparison

The key is knowing when T&M makes sense for your specific project. Complex renovations with unknown conditions? T&M might save you headaches. Simple, well-defined projects? A fixed-price contract probably works better.

What Should Be Included in a Time and Materials Contract?

A comprehensive time and materials contract template should include these essential elements to protect both parties and prevent disputes:

1. Agreement Overview

Start with basic information identifying the parties, project location, and contract date. This section establishes who’s agreeing to what.

2. Recitals

Include background statements explaining why you’re entering the agreement. This provides context if disputes arise later.

3. Scope of Work

Define the work as specifically as possible, even in a T&M contract. While you can’t detail everything, outline general objectives, deliverables, and boundaries of the project.

4. Labor Costs

Specify hourly rates for each labor category you might use. Be clear about:

• Which roles/skills fall into each category
• Whether rates include burden costs (overhead, benefits, insurance)
• How overtime or weekend work is billed
• Minimum billing increments (quarter-hour, half-hour, etc.)

Understanding labor costs helps you set rates that cover expenses and generate profit.

5. Material Costs

Explain how materials will be priced:

• Bill at actual cost plus markup percentage
• Markup percentage specified
• Whether materials include equipment, rentals, subcontractors
• How materials are documented (receipts, invoices)

Calculate material costs carefully to ensure your markup covers procurement, storage, and handling expenses.

6. Time and Materials Terms

Detail the mechanics of T&M billing:

• Billing frequency (weekly, biweekly, monthly)
• Payment terms (net 15, net 30, etc.)
• Required documentation for each invoice
• Process for disputed charges

7. Schedule

Include estimated start and completion dates. Even though final costs aren’t fixed, timeframes help both parties plan.

8. Change Orders

Define how changes to scope are handled, including whether they require written approval before proceeding.

9. Contractor Responsibilities

List your obligations such as:

• Providing qualified labor
• Purchasing appropriate materials
• Maintaining insurance
• Following safety regulations
• Delivering work to professional standards

10. Owner Responsibilities

Specify what the client must provide:

• Access to work site
• Timely review and approval of invoices
• Decisions on material selections
• Compliance with payment terms

11. Insurance

Detail required insurance coverage including general liability, workers’ compensation, and professional liability where applicable.

12. Warranties

Specify any warranties on workmanship or materials, including duration and coverage.

13. Termination

Outline how either party can end the contract, including notice requirements and payment for work completed through termination date.

14. Dispute Resolution

Establish how disagreements will be resolved—mediation, arbitration, or litigation—and in which jurisdiction.

15. Miscellaneous

Include standard clauses about governing law, assignment, amendments, and entire agreement.

16. Signatures

Conclude with signature blocks for all parties, including dates.

Having a solid time and materials contract example to work from saves time. Consider using a sample time and materials contract template as your starting point, then customizing for your specific needs.

Time and Materials Contract vs. Other Construction Contracts

Choosing the right contract type can make or break a construction project. Understanding how time and materials (T&M) contracts compare to other common pricing models helps you balance flexibility, risk, and budget control on a time and materials basis. Below is a side-by-side look at how the most common construction contract types stack up.

Construction Contract Types Comparison

Key Takeaways by Contract Type

Time and materials vs. fixed price

This choice often comes down to how well you can define the scope before work begins. If the scope is clear and unlikely to change, fixed pricing works well. If conditions are uncertain or changes are expected, T&M is usually the safer option.

Cost-plus vs. time and materials

The biggest difference is how profit is handled. Cost-plus contracts add a separate fee on top of actual costs, while T&M contracts build profit directly into hourly rates. For many contractors, T&M offers clearer and more predictable margins.

Why many clients choose GMP contracts

Guaranteed maximum price contracts combine the flexibility of T&M with a built-in cost ceiling. This hybrid approach limits financial risk for clients while still allowing projects to adapt as work progresses, making it especially popular for renovations and complex builds.

Billing With Time and Materials Contracts Best Practices

Effective T&M billing requires systems and practices that ensure accuracy, transparency, and timely payment.

Use dedicated tracking software:

Manual time and material sheets are error-prone and time-consuming. Invest in time tracking software that lets workers log hours in real-time with project details. For contractors, electrical contractor time and material billing software or construction estimating software with built-in time tracking streamlines the entire process.

Document everything immediately:

Don’t wait until the end of the week or month to record time and materials. Train your team to log hours daily and photograph material receipts immediately. Memory fades quickly, and delayed documentation leads to billing errors and disputes.

Provide detailed invoice descriptions:

Your time and material billing invoices should include:

• Date and duration of each work session
• Worker name and role
• Specific tasks performed
• Materials purchased with receipt numbers
• Clear calculation showing rates × hours + materials + markup

Establish regular billing cycles:

Bill frequently—weekly or biweekly for larger projects. This creates steady cash flow and prevents shocking clients with massive invoices. Smaller, regular bills are easier for clients to review and approve.

Include supporting documentation:

Attach time sheets, material receipts, and progress photos to invoices. This transparency justifies your charges and speeds approval. Consider using a free construction invoice template that includes space for itemized time and materials.

Set clear approval processes:

Define who on the client side approves time sheets and invoices, and establish turnaround expectations. Getting approvals while work is fresh in everyone’s memory reduces disputes.

Use e-signatures for approvals:

Digital signature tools let clients quickly approve time sheets and invoices electronically, speeding up the payment cycle.

Compare actuals to estimates:

Even though T&M contracts don’t lock in prices, providing initial estimates helps. Compare actual costs to estimates periodically and communicate with clients when you’re trending over. This prevents surprise and allows course corrections.

Track against GMP carefully:

If your contract includes a guaranteed maximum price, monitor cumulative costs against the cap throughout the project. Alert clients well before approaching the limit.

Maintain organized records:

Keep all time sheets, material receipts, change orders, and correspondence organized by project. Thorough records protect you if disputes arise and support any audit requirements. Many contractors use Excel templates or specialized software to maintain consistent documentation.

Calculate rates correctly:

Ensure your hourly rates truly cover all costs. Include direct wages, payroll taxes, benefits, insurance, overhead allocation, and desired profit margin. Use a service price calculator to verify your rates are adequate.

Understand markup vs margin:

Don’t confuse markup and margin when pricing materials. A 20% markup on $100 materials = $120 billed. Understanding margin vs markup ensures you calculate correctly. This material model approach helps maintain profitability across all your projects.

Get Started with Invoice Fly’s Software

Invoice Fly is a smart, fast, and easy-to-use invoicing software designed for freelancers, contractors, and small business owners. Create and send invoices, track payments, and manage your business — all in one place.

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Conclusion

Time and materials contracts offer essential flexibility for projects where scope, requirements, or conditions aren’t fully known upfront. By billing for actual hours worked and materials used, T&M contracts ensure fair compensation while giving clients full visibility into project costs.

The key to success lies in balance. Clear contract terms, disciplined tracking, frequent billing, and safeguards like guaranteed maximum prices help manage risk and maintain trust. While T&M contracts require more administrative effort than fixed-price arrangements, they’re often the most practical solution for complex or evolving work.

Used correctly, time and materials contracts create transparency, adaptability, and long-term client relationships built on clarity rather than guesswork.

Get Started with Invoice Fly’s Software

Invoice Fly is a smart, fast, and easy-to-use invoicing software designed for freelancers, contractors, and small business owners. Create and send invoices, track payments, and manage your business — all in one place.

Get Started Now