Time and materials (T&M) pricing charges clients for actual hours worked at agreed rates plus costs of materials. This contrasts with fixed-price contracts where payment is predetermined regardless of effort. T&M suits situations where scope is uncertain or evolving.
When T&M Works
Time and materials is appropriate when project scope cannot be precisely defined upfront, requirements are likely to change, ongoing maintenance or support is needed, or the client wants flexibility to adjust priorities. It provides adaptability but less cost certainty.
Risk Allocation
T&M shifts more risk to the client since costs depend on actual effort. The vendor is paid for time regardless of efficiency. Caps, rate limits, and oversight help manage this risk. Fixed-price shifts risk to the vendor who absorbs overruns.
Classification Considerations
T&M arrangements with individual contractors can raise classification questions since payment for time resembles employment. The overall relationship structure matters more than pricing model, but T&M requires careful attention to ensure proper contractor characteristics exist.