What is Time and material contract with a fixed fee ?
Definition of Time and material contract with a fixed fee in Construction
A contractual agreement between two parties, owner and contractor, that is based upon the actual labor time, material and equipment costs, expended on a project. The fee is added, either as a fixed percentage of the cost, or a specific value. In most cases, the fixed fee, is an actual percentage of the cost, which can either increase or decrease, if the scope of the work is revised. There are several negative issues with a time material contract, inclusive of a fixed fee. First and foremost, is that the agreement is open ended, without a guaranteed final value. This is a very dangerous position for any owner to be in. This basically means that the owner of the construction project is not protected from an escalating price , as the structure or project is built. Contractors normally like a time and material contract due to the fact that all the expenses are covered by the owner. It is extremely difficult, and requires a very experienced and diligent construction manager or architect, to control and decipher what the real costs incurred should be, and what costs could have been avoided.
The time and material contract does not require the contractor to efficiently and economically manage the project. If the contractor is aware that every bill and invoice presented, will be financed, then the tendency will be to over purchase, and waste both material, labor and equipment. It is imperative that the owner have some type of measuring point to identify how a project is being managed and constructed. Although, the concept of a time and material project appears fair and reasonable, within the general nature of the contracting business, it creates a situation that is a license to steal. There is a compromise to a true time and material contract. A time and material contract with an upset value or guaranteed maximum price. The contractor is required to present to the owner, a guaranteed maximum price, that will set the upper limit of the owners exposure. In this manner, the overall fairness of the time and material concept is utilized, but the contractor has provided a price that they will not exceed, which protects the owner. In many cases, this type of an agreement will incorporate a savings clause. A savings clause is a sharing of the savings incurred, based upon the difference of the final project value, and the guaranteed maximum price. This will provide an incentive to the contractor to save money on the project. In this manner, the owner is protected from a project that can financially run away and the contractor is afforded the opportunity to operate under the time and material concept, as well as obtain a bonus, if the project is constructed for less than the established guaranteed maximum value. Even with this agreement, the project should be managed and controlled by an experienced and knowledgeable construction manager, or consultant, that accurately identifies the project costs and financially accounts for all the invoices, tickets, requisitions, etc that are applicable to the project.