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time and materials (T&M) contract

A hybrid agreement that blends cost-reimbursable and fixed-price features: the buyer pays for actual labor time at agreed rates and for materials (often with markups), usually with a not-to-exceed cap to control total cost.

Key Points

  • Payment is based on actual hours worked at preset labor rates plus the cost of materials used.
  • Risk is shared: buyer exposure increases if effort grows; seller risk is lower than with fixed-price but higher than pure cost-reimbursable.
  • Often used when scope or duration is uncertain; contracts commonly include a ceiling price and require detailed time sheets and receipts.
  • Requires tight oversight and rate cards; can transition to fixed-price once scope is well defined.

Example

A team needs a data migration expert for an unpredictable amount of rework. They sign a T&M contract at $140/hour plus actual cloud transfer fees, capped at $80,000. The vendor submits weekly time sheets and receipts, and the buyer pays for approved hours and materials up to the cap.

PMP Example Question

A project requires specialized skills for an unclear amount of effort. The buyer wants predefined labor rates and a cap on total spending. Which contract type is most appropriate?

  1. Firm fixed-price (FFP)
  2. Time and materials (T&M) with a not-to-exceed ceiling
  3. Cost-plus-incentive-fee (CPIF)
  4. Lump-sum purchase order

Correct Answer: B — Time and materials (T&M) contract

Explanation: T&M pays for actual time and materials at agreed rates and often includes a ceiling price, making it suitable when scope and duration are uncertain but cost control is desired.

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