Tuesday, July 13, 2010

Beware the Time & Material Contract!

My latest experience with a “Time and Material” contract explains why I have such a problem with them. I had a client who received 3 bids from 3 contractors, one of which had done some small work for them previously and so the client really wanted to go with him. When we received his contract it was “Time and Material”. What this means is that the contractor will bill you straight out for any time and any materials used on your job with an agreed upon mark up for profit and overhead. Sounds good, right?

I pushed back and the clients asked him for a lump sum contract. He said “why? I can come way under budget and why should you pay extra money?” I said “OK. If you know that you can come way under budget, put a ‘Not to Exceed’ price of their budget in it.” The contractor now hmmms and hahs and says “well, I can’t do that”. Now I got to ask “why? If you are so convinced you will come in under budget there is no risk to you here. We have 2 other bids that come in at budget and are lump sum.” He finally gave in and put the “Not to Exceed” into the contract. (The 4 illegal clauses in his contract that I made him revise is a whole other post!)

But the story doesn’t end here. If I had not been tracking his T&M billings throughout the project, no one would have caught the fact that he included material invoices for other peoples’ projects. Nor would they have caught that he made mistakes in the construction and charged the homeowner for the replacement materials and the labor to fix those mistakes. There were more things, but my heart rate goes up just trying to write this. In the end the homeowner negotiated merely a $50k overage to his “Not to Exceed” promise, down from the over $150k (not including legitimate change orders) he wanted to charge them. But, hey, no problem. He can come in waaaay under budget...

This story illustrates one of the reasons that I don’t recommend T&M contracts, but even more than that is that generally a contractor who has taken the time to REALLY bid your job has a much better idea of what he is getting into. The thorough bid is more likely to net a project with fewer hassles. And if the project can’t be done for your budget….you’ll know that before you ever start!

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