Choosing the best construction contract for your project can make a big difference for your bottom line and peace of mind. Cost-plus contracts and time and materials (T&M) contracts are two common construction industry options, each with its own pros and cons. The best choice depends on considering factors like risk, flexibility, and transparency. Ultimately, you need to pick what works best for both the contractor and the client.
Understanding the differences between these construction contracts can help contractors and project managers pick the right fit for their business and budget. Whether you are weighing a cost-plus contract or a time and materials contract vs cost plus, knowing how they impact costs and your project scope is the key to making a more informed decision for your project.
What is a Cost-Plus and Time and Materials Contract?
Cost-Plus Contracts
Cost-plus construction contracts allow the contractor to get reimbursed for project costs. This includes labor, materials, overhead, and includes an agreed-upon fee. Unlike a lump sum contract, which has a fixed total price, cost-plus contracts require detailed tracking of expenses to make sure proper reimbursement and transparency are present.
The contractor will receive more flexibility with this kind of contract, and this makes sure their expenses are covered, but it will require them to provide detailed documentation, and the need for clear and transparent communication with the client to avoid any miscommunications or disputes.
Time and Materials Contracts
T&M contracts will also include covering actual labor and material costs, but instead of the agreed-upon fee, rates are settled upfront. This type of construction contract works best for projects that may involve scopes that shift but will need the contractor to carefully track costs, which can add up quickly. For a deeper dive into how T&M billing works and how to manage it effectively, check out our Time & Materials Billing Guide.
Key Differences Between Cost-Plus and T&M Contracts
Factor | Cost-Plus Contracts | Time & Materials Contracts |
Flexibility | High. Allows for changing project scopes. | Reasonable. Labor rates and material costs are set, but the scope can change. |
Risk | Higher for the client. They cover all costs, even if the costs increase. | More balanced for both. The contractor gets paid for actual work, but rates are locked in. |
Transparency | High. Detailed tracking of costs is required. | Reasonable. Pre-set rates make billing simpler but require tracking. |
Ideal Use Cases | Large, complex projects with changing scopes. | Shorter projects with well-defined labor and material costs. |
Take Back Control of Your Time Keeping
Which Contract is Right for Your Project?
Choosing the right construction contract for your project depends on what is included in the project scope, what your budget looks like, and how much risk you’re willing to assume. A common debate in construction is T&M vs cost plus. Here are a couple of factors to consider before deciding:
- Does the project scope look well-defined, or could it change?
- Do you need to be certain of the cost, or do you consider flexibility more important?
- How comfortable are you with tracking and documenting costs?
- Can you estimate labor rates and material costs easily upfront?
Answering these questions will help you choose the contract that best fits your needs.
When to Choose a Cost-Plus Construction Contract
Choose a cost-plus contract for your construction project when the scope seems likely to change. If labor and material costs seem like they will change during the project, this contract will provide you with the flexibility needed. If your client needs to understand the cost tracking and approvals of the project in greater detail, this is also a good option.
When to Choose a Time and Materials Contract
Contractors are more likely to choose a T&M contract when the time & material usage can be estimated, but the timeline is harder to pin down. The work could depend on external factors like permits, weather, or supply chain delays could be in play. There could also be unexpected site conditions that might change what the workload looks like. T&M contracts can help keep things moving along by covering actual labor and material costs without locking contractors into fixed pricing. For clients, a T&M contract provides cost disclosure without locking them into a fixed price. Set labor rates and material costs help with budgeting while keeping the project flexible if it runs longer than expected.
What to Avoid with Cost-Plus and T&M Contracts
While cost-plus and time and materials contracts can provide benefits to contractors and clients, both contracts can lead to problems if they are not managed properly. A common challenge when comparing a time and materials contract vs cost plus is tracking labor and materials efficiently while ensuring the client has transparency. The biggest mistakes come from bad documentation, unclear agreements, and a lack of contractor and client understanding.
- Messy cost tracking leads to payment disputes. If labor, materials, and markups aren’t documented properly, clients might challenge invoices, delay payments, and question every charge. Without clear records, you’re setting yourself up for potential miscommunication.
Even companies with solid processes in place found that manual time tracking created inefficiencies. As Rob Frost, Program Manager for Systems and Strategy at NexGen Contracting, explained:
“We verified workforce hours under analog systems, paper time cards… It worked, but it had the inherent errors and the administrative drag that the analog systems have on our business.”
- Clients don’t like surprises in their invoices. They need a clear breakdown of labor and material costs. If pricing isn’t upfront, expect pushback, frustration, and unnecessary back-and-forth when it’s time to get paid.
- Unclear labor rates and markups cause headaches. If these details aren’t locked in from day one, the final bill could be a problem. The last thing you want is a client disputing costs because expectations weren’t set in writing upfront.
Keep your records tight, set expectations from day one, and communicate clearly. When everything is tracked and agreed upon upfront, disputes disappear, projects run smoother, and invoices get paid on time.
Take Back Control of Your Time Keeping
How Technology Simplifies Cost-Plus and T&M Contracts
Need help tracking labor, organizing materials costs, and keeping client communication smooth? The right technology solution can help you manage cost-plus and time and materials contracts without complications. When you automate your time tracking using AI-powered biometric facial verification, every hour worked is logged 100% accurately. No more second-guessing your timesheet accuracy! Even for experienced teams, manual tracking often left too much room for error.
As Bill Everett, Regional Manager/ General Superintendent at WPI, explained:
“Before SmartBarrel, we were basically taking somebody’s word for it that they were actually on-site. After implementing SmartBarrel, we found that hours dropped significantly across all projects.
With every check-in and check-out, SmartBarrel captures a timestamp and a real-time photo of the worker on-site, making sure all labor hours are verified. What this means is there’s no room for disputes when your timekeeping provides an indisputable record of actual labor hours. Plus, because workers clock in using the on-site time clock, there’s no risk of buddy punching or offsite clock-ins. With SmartBarrel you also gain visibility into cost tracking with built-in cost coding, keeping your labor costs organized and easy to reconcile. Your back office is going to LOVE you! For companies managing multiple projects, manual approvals took up valuable time that could have been spent on higher-priority tasks.
That was the case for WPI, where Bill Everett shared how much time his team used to spend on approvals before making the switch:
“Before SmartBarrel, approvals could take five hours on a big job. Now, I can verify everything in ten minutes.”
If you’re looking to track materials, technology can track them digitally to help prevent missing receipts and unexpected overages; this helps keep your project costs visible and under control. If your clients can see real-time costs, there should be less disputes, less surprises, and more visibility from the beginning of the project to the very end. WIP reports can help track financial health and project progress, giving contractors better visibility into real-time costs. Learn more in our Ultimate Guide to WIP Reports in Construction.
For companies managing large-scale projects, making the switch to automation brought measurable results.
Harper Electric’s President August Grunewald summed it up best:
“We went from completely manual time data entry to this. I’d say it’s 60-70% automated now. The difference is light years.”
FAQs
1. What are the main differences between cost-plus and T&M contracts?
Both contract types reimburse contractors for actual costs, but they handle profit differently. In a T&M contract, labor and material rates include a markup, so profit is built in. A simple cost plus contract definition is that it reimburses contractors for actual project costs plus a fee or percentage. This means contractors get paid for materials, labor, and overhead while also earning an agreed-upon profit.
2. Are cost-plus contracts more expensive than T&M contracts?
Not always. Cost-plus contracts provide more flexibility, but without proper oversight, costs can creep up. T&M contracts offer more cost predictability but may not work well for projects with shifting scopes.
3. Which contract type protects contractors more?
T&M contracts offer more protection since labor and material costs are agreed upon upfront, reducing financial risk for the contractor.
4. Can these contracts be combined?
Yes. Some contractors use a hybrid approach, setting fixed labor rates (T&M) while allowing material costs to be reimbursed (cost-plus).
5. What are the potential drawbacks of cost-plus contracts?
Cost-plus contracts can lead to budget unpredictability. Since actual labor and material costs fluctuate, the final price may end up higher than anticipated. Without proper cost tracking, it can be hard to keep spending under control.
6. Are there legal considerations with these contract types?
Yes. Some jurisdictions regulate contract types differently. For example, in California, cost-plus and T&M contracts are not allowed for home improvement projects because total contract amounts and payment schedules must be specified upfront. Always check local contract laws before signing.
Take Back Control of Your Time Keeping
Final Thoughts
Making or breaking a project starts with picking the right contract. Cost-plus construction contracts give you the flexibility you may need when the project scope isn’t set in stone, but they can put more financial risk on the client and require the contractor to carefully track costs. Time and materials contracts can offer more predictability with fixed labor rates and material costs, making them a better fit for tighter budgets,
Like all construction contracts, neither one is foolproof. Contractors are still required to provide solid documentation and clear markup agreements, or miscommunications can happen fast. That’s where construction software technology makes a difference. Automated time tracking keeps labor costs accurate, digital material tracking prevents unexpected overruns, and real-time reporting keeps everyone on the same page. With SmartBarrel, contractors don’t have to rely on guesswork or manual reconciliations.
As Rob Frost, Program Manager for Systems and Strategy at NexGen Contracting, put it:
“We’ve seen significant improvement in the efficiency of the process, especially how SmartBarrel automates that process for us, how we clock in and clock out our folks on the job site. Automation, when applied correctly and applied with a great team, has inherent efficiencies from the start.”
Understanding the difference between cost-plus contracts and time and materials contracts helps you make smarter decisions that fit your budget and project needs. If you’re wondering what does cost plus mean, the answer is simple. It is a contract where the contractor gets reimbursed for actual expenses plus an agreed-upon fee or markup.
Tired of chasing down timesheets and dealing with contract disputes? SmartBarrel makes labor tracking effortless, so you can focus on running your projects, not fixing payroll mistakes.
Schedule your free demo today or email us at [email protected] to see how SmartBarrel keeps your jobsite running smoothly.
