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How to navigate an effective time and materials contract?
Inflation may leave you confused while choosing the right pricing models for your business or project. It is crucial to know about such models to ensure you choose the right type of pricing contract. There are two primary pricing models, which you may choose from:
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Fixed-price model
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Time and materials model
The operational workflow, functionality, and overall budget play a key role in selecting the perfect pricing model for your needs.
Thus, decide your payment terms after you have made the appropriate choice. Your pricing model establishes the type of contract you wish to secure. For instance, in a fixed-price contract, you agree to pay the contractor a lump sum amount. This kind of arrangement may be ideal for software companies. Their project roadmaps are usually pre-fixed, with the internal timeframe and milestones displayed. Therefore, the contractor agrees to complete such projects within set deadlines at a fixed rate.
On the other hand, in a time and materials contract, you do not define the final estimations of your project or business. Usually, construction companies benefit from such a model, as setting final estimates may get difficult. Therefore, the contractor or subcontractor is paid as per the materials and hours invested. This process is transparent, as you can verify the invoice and time logs to ensure correct costs. Hence, the scope of disputes is less. You will no more be guessing where your money is flowing.
Let’s know more about the time and materials contract.
What is a time and materials contract?
A time and materials contract is a binding agreement, signed between contractors and companies, in need of labor hours and materials. Such a contract (also known as a T&M contract) may also be known as a cost-plus contract. It is commonly preferred by owners or companies, due to its convenience and flexibility.
When to opt for a time and materials contract?
The T&M contract is perfect for the following cases:
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Projects with a developing set of requirements
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Projects unsure of the exact scope of work
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Projects that need flexibility, as per the changing market requirements
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Projects based on untested business models
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Projects under a tight time limit
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Projects in need of constant monitoring and transparency to track the development of each phase
Generally, this model fits most project or business requirements. So let’s take a closer look at the benefits of the T&M approach in detail.
Why choose the time and materials model?
The following points provide the key benefits of the time and materials model.
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More flexible: You can modify the project’s requirements and form, as per the market scenario. Hence, revising such contracts is not needed, as the scope of work can be altered without re-negotiation.
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Return on investment: When you pay on an hourly basis, the project priorities align with your needs. The contractor works on things that are important to you. Also, it helps you keep a check and provide feedback, as per the changing industry patterns.
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Fast: It may take time to define your entire scope of work before you get started. Hence, this model allows you to start fast with a tentative plan and decide the final requirements along the way.
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Pay for the work done: You pay for the actual work completed as per the invoice. If you wish the invoices to be under your budget, specify accordingly. This keeps you in control of the finances. If more work is required above your outlined budget, negotiate accordingly.
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Limits risk: As the process is transparent, you are involved in each step. You ensure the work is completed as per the set deadlines. Thus, reducing the scope for uncertainties.
Things to consider while drafting a time and materials contract
Keep in mind these possibilities before making such a type of contract.
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Losing control: When we proceed without a concrete plan, at the beginning of the project, it can get expensive. Even after we set a budget, if the work is pending, the costs may increase.
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Project delay: If you do not fulfill the funding requirements, then the project completion might be delayed.
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Disputes: Since payment is upon receipt, arguments may arise if you cannot pay on time.
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Lack of knowledge: If you do not understand the project circumstances well, disagreements will happen. This may create a bitter situation. It’s best to understand your contractor’s perspective and discuss it patiently.
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Profits: You must ensure the profit margin is appropriate. This will create motivation in your contractor, to deliver the best results.
Contract terms
Mentioned below, are a few key terms and conditions that should be included in your time and materials contract.
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Introduction: Here, you summarize the essential elements of your contract. Start by establishing both parties, and provide their primary address and contact details. Define their roles. Also, provide a declaration to establish the said parties agree with the terms and conditions outlined.
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Contractor’s responsibility: Define the initial scope of work. Here, mention the hourly rates, with the approximate materials required.
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Time is of the essence: This section establishes the value of time. The contractor is to fulfill their obligations as per the target time frame.
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Rates: Here, define the pricing of the contractor’s responsibilities. Mention the labor rates, actual cost of materials, markups, profits, tax, and any other miscellaneous amounts you want to outline.
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Payment: This is a very important section to maintain peaceful relations between the parties. Here you define the final cost estimate of your project, the billing method, fines for late payments, reimbursements, and more.
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Confidentiality: Here, you declare that the information provided by either party is private and cannot be shared with any external individuals.
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Relationship of parties: This clause establishes that no employee-employer relationship will be formed between the parties.
Final thoughts
You need to be clear while drafting the terms and conditions of your T&M contract. The above-mentioned aspects shall help in decision-making. Also, having an accurate estimate of the project and foresight will ensure you leave no room for loopholes.
Use Revv’s ready-to-use contracts
Revv offers a range of editable contracts for our users to customize effortlessly. Also, our legal team ensures such documents are legally vetted. Our contract templates have inbuilt features, like e-signature, payment features, and more. Thus, editing this contract sample will not take much of your time and energy.
We have taken care of your documentation requirements. Start now!