Time & Materials vs Fixed Fee

	Fixed Fee	Time and Materials
Pro	Known cost to customer	Maximum flexibility Easy to negotiate changes Less risk for contractor (materials costs, unknown damage to building, etc.)
Con	Risk to contractor – requires mark up for contingency (esp in old buildings) If scope changes, harder to negotiate on even footing	Buyer takes all of the risk of unknown conditions/ poor estimation Perceived low incentive to work efficiently Need for time tracking / paper trail

When you sign a contract, both parties should be clear what the nature of the contract is. As a buyer, you should ask for clarity about the terms of the contract, including bid type. This doesn’t have to be confrontational. Just say “hey, is this a fixed fee bid?” The other person will usually clarify that it is, or it isn’t. I’ve found that when I ask that, they may provide additional clarity about other aspects of scope (if it is fixed fee), or they’ll say, “no that’s a rough estimate, and here’s how it breaks down.”

I’ve had this work both ways already.:

Time and Materials One subcontractor came in and said “we usually would bid this fixed fee, but we just don’t know how bad it’s going to be once we get the walls open. We’d like to do T&M, and here’s our rate.” In fairness, I pointed out that I was taking all of the risk, so they agreed to a slight reduction in their rate. I pay for materials directly with the supplier. If the sub has to go get materials, that time is “on the clock”. If they have to grab extra materials for my job, it’s just added to the invoice with no markup.

I have another sub who works with me on a T&M basis. He has a number of employees, and some are better than others. In a side conversation, he mentioned that “Sam” spent 32 hours on my job last week. I was surprised, because progress wasn’t as good as I’d have expected. I use an electronic door lock on my job sites, so I could look up the times that “Sam” arrived and left. I provided those records to the subcontractor, because “Sam” hadn’t been on my site most of the time he said he was there. T&M contracts will require that you either trust the sub or that you have a way to verify the hours spent.

Fixed Fee. I received a bid for some work that I thought was “fixed fee”. The bid was very high, and I asked if I could do something to lower it. The sub identified a part of the work that was very expensive (erecting scaffolding and removing it), and I was able to do that work myself before they started, so they were able to reduce the bid by that amount. So far so good, but… then we had some increases to scope. Basically, when they started doing their work, there were a few places where there was damage that needed to be repaired. The cost of those repair items was surprisingly high. Unfortunately, we hadn’t discussed the cost of those repairs- they just added it to the bill. Pretty ugly.

I have another sub who bid work fixed fee. Before the job had even started, he was talking to me about the increased cost of materials, and then also his increased labor costs. (He originally thought he was going to be able to deliver materials to the second and third story by boom, but it turns out he couldn’t, so he’s going to have to pay people to carry it up two flights of stairs). This work isn’t done yet, and I’m waiting to see what the final tab on this all looks like. My “contract” with them is fairly light – an email that lists the scope of work, a single price, and specifies what types of materials are to be used, and a target start date and duration. I’m trying to be open minded, as there are always things that are flexible in contracts like this. (e.g. How straight is “straight enough” for this wall? We need to reroute this pipe from here to there- is that a change order?). I intend to be pretty particular about the work standards for this part of theproject, and I’ll push to make sure those standards are met. I’m willing to take a little bit of risk on costs to maintain the relationship and press for quality of work in this case. Being a jerk early on can hurt you, but being a pushover is bad too, so it’s a fine line to walk.

If we’re doing a fixed fee contract, my preference would be that it at least calls out labor vs. materials. I don’t need a minute by minute accounting, but I need a rough breakdown to make sure that we have some understanding of the costs. Why do I need this?

• CHANGE IN COST “My materials costs went up. I need to pass that along to you.” (No- you should have bought the materials when we signed the contract).
• CHANGE IN SCOPE We need to add two more cabinets. (Why is it these two new cabinets appear to cost 3x per lineal foot vs. the ones I already signed for? I’m over a barrel bc I can’t really change cabinet shops mid-job.)
• BACK OFFICE In some rare cases, I’ll work with a sub that doesn’t carry Workers Comp. I need labor vs. materials so I only count the labor costs against my WC policy.

I’ve seen some contractors argue that “You don’t get a price breakdown at Applebee’s. I’m not going you one either”. A thoughtful discussion about what the concern is, and other ways you might address the concern will be a lot more effective than just “hell no”. If you don’t address the underlying *reason* for the question, you’ll have an issue later. You may not care about losing this customer, but what insights did you NOT get about your own bid? Is there something you could learn about how a prospective client sees your business?