This method involves charging the client based on two main factors:

  1. Time Spent (Labor Costs):
    • The hours worked by laborers or contractors, often billed at an hourly rate.
    • Rates may vary depending on the worker’s skill level, such as apprentice, journeyman, or foreman.
    • Typically includes a markup to cover overhead costs like insurance, benefits, and administrative expenses.
  2. Materials Used (Material Costs):
    • The actual cost of materials needed for the project, including shipping and handling.
    • A markup is usually added to the material costs to account for procurement efforts, storage, or as a profit margin.

Converting T&M to Price

To calculate a project’s final price based on the T&M method:

  1. Estimate Time:
    • Calculate the hours required to complete the project based on past experience or project scope.
    • Multiply the hours by the labor rate(s) to determine the labor cost.
  2. Estimate Materials:
    • Identify all materials needed for the project.
    • Add the cost of each material, including applicable taxes or shipping fees.
    • Apply a markup to the material costs (e.g., 10-25% is common in many industries).
  3. Add Other Costs:
    • Factor in any additional costs, such as equipment rentals, subcontractor fees, or permits.
    • Include contingency for unforeseen issues (commonly 5-15%).
  4. Markup for Profit:
    • Apply an overall markup to ensure profitability, particularly if time and material costs are only break-even rates.
  5. Total the Components:
    • Add up labor, materials, additional costs, and profit to arrive at the final price.

Advantages of T&M Pricing

  • Flexibility: Adjusts for changes in scope or unforeseen circumstances.
  • Transparency: Clients see where their money is going.
  • Accuracy: Aligns costs with the actual resources consumed.

Challenges of T&M Pricing

  • Lack of Predictability: Clients may be wary of open-ended costs.
  • Management Complexity: Requires detailed tracking of hours and material use.
  • Potential Disputes: Miscommunication about rates or inefficiencies can lead to disagreements.

When to Use T&M to Price

  • For projects where the scope is uncertain or likely to change.
  • For tasks involving variable material use or labor intensity.
  • When detailed documentation can justify costs to clients.

This pricing method often works well in service contracts, repairs, or unique construction projects but may not suit fixed-budget scenarios.