Time and Materials

Time and materials (T&M) contracts reimburse contractors for actual labor hours at predetermined hourly rates plus material costs with specified markups, providing a flexible contracting mechanism when scope cannot be defined precisely before work commences. This cost-reimbursement approach suits HVAC service work, emergency repairs, investigative demolition, and small projects where fixed-price bidding proves impractical due to scope uncertainties.

Overview

T&M contracts transfer cost risk to owners since final payments depend on actual labor hours and material consumption rather than fixed prices. Contractors bear minimal risk beyond ensuring their hourly rates cover direct costs, overhead, and profit. This risk allocation makes T&M appropriate when scope unknowns preclude accurate fixed-price estimating, but owners must implement controls to prevent excessive hours and inflated material costs.

The contract establishes hourly billing rates for various labor classifications—HVAC mechanics, apprentices, foremen, project managers—along with material markup percentages and equipment rental rates. Contractors track daily labor hours, material purchases, and equipment usage, submitting periodic invoices with supporting documentation. Owners approve time sheets and material receipts before authorizing payment.

Hourly Labor Rates

Hourly rates for T&M contracts must cover direct wage costs, fringe benefits, taxes, insurance, overhead, and profit. Typical rate structures:

Rates vary by geographic market, union status, contractor overhead structure, and competitive conditions. Contractors submit detailed rate breakdowns showing base wages, burden factors, and profit percentages to justify proposed rates.

Hourly rates remain fixed throughout contract performance unless material escalation clauses, wage adjustments, or contract extensions trigger renegotiation. This rate certainty allows owners to compare contractor pricing despite unknown final hours.

Material Costs and Markup

Material reimbursement covers contractor procurement costs plus a markup percentage compensating for purchasing, handling, storage, and financing expenses. Typical markup structures:

• Cost Plus Percentage: Reimburse actual material costs plus 10-20% markup
• Actual Cost Plus Fixed Fee: Reimburse actual costs plus fixed dollar amount per invoice
• Receipted Costs: Reimburse based on supplier invoices and delivery receipts

Material markup negotiations balance contractor compensation for procurement services against owner cost control. Excessive markups incentivize contractors to specify expensive materials rather than economical alternatives.

Contracts define reimbursable material costs as contractor’s actual purchase price excluding volume discounts, manufacturer rebates, and early payment discounts that should benefit the owner rather than increasing contractor profit.

Equipment Rental Rates

T&M contracts establish rental rates for contractor-owned equipment (owned equipment rates) or reimburse actual third-party rental costs plus markup. Equipment compensation addresses:

• Small tools and consumables (often included in hourly labor rates)
• Specialty HVAC equipment (refrigerant recovery machines, vacuum pumps, brazing equipment)
• Access equipment (scaffolding, lifts, ladders)
• Transportation vehicles (service trucks, vans)

Owned equipment rates typically follow industry standards such as Associated General Contractors (AGC) or Federal Acquisition Regulation (FAR) schedules providing monthly, weekly, and daily rental equivalents.

Not-To-Exceed Limits

Not-to-exceed (NTE) limits establish maximum contract values beyond which contractors may not bill without owner authorization. NTE provisions protect owners from runaway T&M costs while maintaining work flexibility within defined budgets. Common NTE structures:

Project NTE: Maximum total contract value including all labor, materials, and equipment. Work stops or requires change order authorization when approaching the limit.

Periodic NTE: Monthly or weekly spending caps requiring owner approval before exceeding.

Phase NTE: Separate limits for distinct work phases allowing owners to authorize incremental scope.

NTE enforcement requires contractors to notify owners when cumulative costs reach specified percentages (typically 75-85%) of the limit, allowing timely authorization decisions or scope adjustments before budget exhaustion.

Daily Progress Reports

T&M contracts mandate daily reporting documenting labor hours, materials consumed, equipment usage, and work accomplished. Daily reports serve multiple purposes:

• Substantiate time and material invoicing
• Track progress against estimated hours and budgets
• Identify productivity issues or scope changes
• Provide contemporaneous documentation for dispute resolution

Report content includes worker names and classifications, hours worked, tasks performed, materials installed, equipment used, and field observations regarding site conditions or design issues. Owner representatives review and approve daily reports, creating a verified record of work performed.

Time Tracking Requirements

Rigorous time tracking prevents billing disputes and verifies invoice accuracy. Tracking systems document:

• Worker start and stop times
• Lunch and break periods (typically non-billable)
• Productive time versus standby or waiting time
• Travel time billing (often at reduced rates or non-billable)
• Overtime hours and applicable premium rates

Electronic time tracking through mobile applications, GPS-enabled systems, or cloud platforms provides real-time visibility into labor costs and facilitates prompt invoice verification. Manual time sheets require supervisor verification and owner representative approval before billing.

Engineering Considerations

T&M contracts suit HVAC work where scope uncertainties exceed acceptable risk levels for fixed-price contracting. Applications include:

Service and Repair Work: Equipment failures requiring diagnostic investigation before repair scope determination make fixed pricing impractical. T&M allows work to proceed while technicians identify root causes and necessary repairs.

Existing Condition Investigations: Hidden systems, concealed conditions, and unrecorded infrastructure modifications prevent accurate scope definition before exploratory work. T&M provides flexibility to adjust scope as discoveries emerge.

Emergency Response: Catastrophic equipment failures, refrigerant leaks, or environmental control losses demand immediate action without time for fixed-price bidding. T&M contracts engage contractors rapidly while maintaining cost documentation.

Small Projects: Administrative overhead for formal bidding and fixed-price contracts may exceed the value of minor HVAC work. T&M provides simplified procurement for small installations or modifications.

However, T&M contracts create adverse incentives where contractor profit increases with labor hours and material consumption rather than efficiency. Owners must implement oversight to verify reasonable productivity and prevent unnecessary scope expansion.

Best Practices

Establish reasonable hourly rates through market comparison, published rate surveys, or competitive quotation from multiple contractors. Inflated rates increase costs across all work hours.

Define billable versus non-billable time explicitly, addressing travel, mobilization, waiting time, and breaks. Ambiguous definitions generate invoice disputes and payment delays.

Require detailed material invoices with supplier receipts rather than contractor estimates or rounded prices. Verify that markups apply to actual purchase costs excluding volume discounts.

Implement NTE limits appropriate to scope uncertainties and budget constraints. Monitor cumulative costs regularly to avoid surprise budget overruns.

Assign owner representatives or third-party inspectors to verify daily progress reports, approve time sheets, and validate work quality. Absent oversight, T&M contracts lack cost discipline.

Consider converting T&M work to fixed-price once scope clarifies through initial investigative work. Hybrid approaches use T&M for exploratory phases followed by lump sum pricing for defined installations.

Audit material procurement practices to ensure contractors select cost-effective products rather than expensive alternatives that maximize markup-based profit.

Negotiate incentive provisions sharing savings when actual costs fall below NTE limits, encouraging contractor efficiency despite hourly billing structures.