I’m going to guess, that a time and materials contract between a homeowner or a business owner and a contractor, is in the minds of most people a perfectly legitimate way to structure a business relationship for construction.  You pay the contractor for what is done, no more, no less.  But also, the total cost and time required to do the work are not known at the outset.

 

This is in fact a common way for architects and their clients to work together.  The logic is that at the outset of the work, the nature and scope of the work are not clearly known.  Some things which seem simple at the outset prove to be otherwise and in the interest of fairness to all parties, the cost of the work is allowed to vary with its complexity.  And, in the case of architects this arrangement is perfectly legal.

 

The same initial uncertainty about the scope of a project can occur with construction projects.  And when there is some special need to get the work underway quickly, a time and materials contract can be a useful way to structure the relationship between the parties.  In a very informal and unscientific survey, I found that nearly all contractors responded that they had provided services to customers on time and materials basis.  My impression was that this approach was no more or less problematic than any other, just equally problematic in its own ways.  

 

Maybe you already figured this out, but time and materials contracts are not a legal way for contractors to operate in California, except in instances where the dollar value of the work is less than $750 and the work can be considered “repairs.”  So the contractor may end up in a situation where they have a contract that will be regarded as legitimate when the duties of the parties are considered, but which may not be a proper way for a contractor to conduct business from the standpoint of their license obligations.  This to the best of my knowledge does not free the customer from their obligations but it may leave the contractor vulnerable to sanctions by the board that issues contractor’s licenses in California.

 

The state requires contractors to enter into written contracts with their customers that specify the cost of the work and the time it will take to complete it.  If the scope of the work is clear and does not change, that should allow a customer to budget for the cost of the project and not find themselves with an incomplete project and no more funds, or a project that greatly exceeds their cost expectations at the start of construction.  A time and materials contract also comes with the risk that the builder will not pursue the work as diligently as they would if they were at risk losing money if they do not work efficiently.  The prohibition of this contract form does provide some protection from dishonest contractors.

 

But there are honest contractors just as there are dishonest ones.  An honest contractor will work efficiently, treat you fairly, and charge your for their costs.  No more, no less.  But if you ask an honest contractor to give you a fixed price for the work to be done, they will have to account for the risk that actual costs may be higher than they estimate.  This is a real risk in projects (residential projects and highly complex projects) where the contractor will face many unique conditions.  In order to protect themselves from losses due to tasks which are hard to precisely estimate, even an honest contractor will price the work at a point higher than, “if all goes well.”

 

On the other hand if you have an honest contractor to work with, and “all goes well,” that work will cost you less if you are working on a time and materials basis than it will if you work on a fixed price basis and the contractor has to factor in some contingency for things not going as he/she hopes.  So in some cases the consumer stands to get more for their money in a time and materials contract than a fixed price contract.

 

I don’t think people start construction projects with contractors they do not trust.  Both trustworthy and untrustworthy contractors are trusted at the outset.  Many people go with their gut and do time and materials contracts.  It is appealing to contractors because it greatly reduces, it is thought, their risks.

 

So is this a good way to go?

 

Speaking for our company, More Than Construction, we think that in some situations (our architectural work) something similar to a time and materials contract is functional, but in most cases we avoid anything like it for construction.  There are a few reasons for this.

 

First, while we greatly respect our clients financial resources, people who hire us are not concerned about money above all else.  They are, frankly, quite as well concerned about how they want to live their lives and whether their surroundings supports or detracts from their concern to live well, as they define it.  A designer-builder who is a bit more efficient than us will not necessarily give the most useful result.  So if we are being considered along with some other honest builder, the people who hire people like us will give a lot of thought to the quality of the end result along with the cost of the project.  So the theoretical cost advantage of a time and materials contract, is probably not the deal maker with our customers.

 

Second, time and material contracts can have a significant administrative burden which is a cost the customer will pay for.  In a time and materials contract the contractor must present all expenses to the customer for review.  These may be considered, discussed, documented, and substantiated with a large number of receipts.  On complicated projects this will eat up hours and hours of the builders time and may sabotage any hoped for cost benefits.

 

Third, since all of our construction work begins with architectural design work, we get to know our customers very well.  They share frankly with us how they live and how they want to live.  We know details their neighbors do not know, and will not know on our account.  We build trust, depend on it, and know that it is fragile.  In my view a time and materials contract is too stressful for this kind of relationship.  In the normal course of construction many things happen which are not completely expected and not optimally efficient.  In a fixed price contract those are our problems and will not be a cause for our customers to fret.  We fix the normal problems and fix them right.  It’s all part of what we promised to do in the first place.

 

Construction, especially residential construction and remodeling, is inherently stressful.  We would rather help our customers manage that stress than add to it.

 

Still, Time and Materials contracts, like some substances and cars going faster than 55, happens.  Looking ahead I can see a couple initiatives which might be beneficial for builders and their customers alike.

 

First, in my opinion, the state should stop pretending like time and materials contracts don’t exist or are rare.  A way should be found to allow this form of contract where it seems beneficial, while protecting the interests of consumers.  That way might include state mandated contract language that makes it clear that all parties have been apprised of the risks, and have had a reasonable opportunity to consider them and if necessary to decline them.

 

Second, also in my opinion, the state should support explicitly the cost plus a fee or a time and materials with a not-to-exceed cap contracts.  I think both consumers and contractors can benefit.