Cost Plus Vs. Time and Material Contracts
When a client and contractor work together to develop a contract, there are several ways to structure the cost. Some of the most common costing options are fixed-price, cost-plus and time-and-material contracts. While fixed price contracts are pretty straight forward, it’s important to compare cost plus vs. time and material contracts.
Cost Plus Vs. Time and Material Contracts
In this article, we define and compare cost plus contracts with time and material contracts. The post also highlights when the contracts are used.
Cost Plus Contracts
As the name suggests, this type of contract involves the client paying the costs of the project in addition to a profit agreed upon during the contract negotiations. These types of contracts typically represent a win-win for the contractor because all expenses are likely to be paid and all risks are essentially covered.
Contractors typically use cost-plus contracts as a tool to get compensated for almost all costs related to the job. However, the contractors must present evidence and justify the costs related to the job.
When to Use It
Cost-plus contracts might be used when it’s highly likely that actual costs might be reduced or when the budget is restricted. This type of contract is preferred when there’s insufficient data to provide a detailed estimate of the work or when the design is incomplete. Government agencies also prefer this type of contract because it allows them to select a contractor based on their qualifications rather than hiring the lowest bidder.
Cost-plus costing is also widely used for research and development projects because the risk can be controlled by the contracting officer.
Time and Material Contracts
Time and material contracts involve both a client and vendor agreeing on predetermined unit rates for materials and labor, and there’s no preset price for construction. This type of contract is typically used when getting an accurate estimate of the total project cost is impossible, when changes are likely to be made during construction or when the schedule cannot be defined. There’s no limit on how much a project will cost or how long the project will take, which presents the least risk for the contractor/vendor and the highest risk for the client/owner. There are also a number of other advantages of time and material contracts.
When preparing a time and material contract, the primary billing unit for time becomes a labor hour and materials are billed at-cost. So, the contractor keeps track of the time spent on the project and materials purchased. The contractor will bill the client on a schedule as outlined in the contract — typically either periodically or when a certain dollar amount of costs are accumulated. This is one of the benefits of T&M contracts.
Bottom Line
When you think about using cost plus vs. time and material contracts, you probably wonder why either side of the contract might prefer each option. Each type of contract has its inherent costs and benefits so the best option just depends on the preferences and priorities of both the client and vendor. The most important factors to consider, therefore are the speed, quality, and cost — and how each may be impacted by either cost-plus or time and material costing. To understand more about the two types of contracts mentioned, it is best to familiarize yourself with how to manage a construction project.
