Time and materials (T&M) is a contract pricing model in which the buyer pays for the labor a provider actually spends, at agreed hourly or daily rates, plus the cost of materials, equipment and approved expenses used in the work. It is common for IT projects, consulting, installations, field service visits and work outside a managed service contract’s scope. T&M is often set out in a statement of work (SOW) under a master services agreement (MSA).
At a glance
- You pay agreed rates for hours or days worked, plus materials and expenses.
- The buyer carries the risk that the work takes longer than estimated.
- It suits work whose scope is uncertain or likely to change.
- Rate schedules, caps and approval points are the main cost controls.
- Fixed-price and managed service fees are the usual alternatives.
What problem it solves
Some work cannot be priced accurately in advance. Troubleshooting an intermittent network fault, assessing an inherited environment or helping with a migration whose details are still unclear all carry unknowns. A provider asked for a fixed price on that kind of work will often add a large contingency or narrow the scope until it no longer matches what the buyer needs.
T&M avoids that problem by paying for effort as it happens. Work can start quickly, scope can change without renegotiating the whole price, and the buyer does not pay a premium for risk that may never materialize. It is also the default way many providers bill for ad hoc requests, such as an on-site visit or a configuration change outside the agreed scope of a managed service.
How it works
Rates. The contract sets rates for each role or skill level, such as engineer, senior engineer or project manager, often in a rate card. Rates may differ for after-hours, weekend or emergency work, and there may be minimum billable increments or call-out charges.
Materials and expenses. Parts, equipment, licenses and travel are billed separately, either at cost or with a markup, depending on the contract. Many contracts require prior approval for items above a set amount.
Estimates and caps. The provider usually gives an estimate. A not-to-exceed cap turns that estimate into a ceiling that typically requires approval before it can be passed. Without a cap, the estimate is only a guide.
Tracking and invoicing. The provider records time by person and task. Invoices are typically issued monthly or at milestones, with timesheet detail on request or attached.
Compared with other models. Under a fixed-price contract the provider agrees a set price for a defined scope and generally bears the cost overruns needed to deliver that unchanged scope, subject to the contract’s stated assumptions, dependencies and relief events. Work outside the defined scope follows the agreement’s change-control process and is usually priced separately. Under outcome-based pricing, some or all of the fee depends on agreed business results. Many engagements mix models: a fixed price for defined phases and T&M for discovery or change requests.
How caps, change requests and billing disputes work depends on the contract and governing law. Terms vary, so have counsel review larger T&M agreements.
When it matters for buyers
- Unclear scope. Discovery, diagnostics and early project phases are good fits.
- Ad hoc support. Work outside a managed service provider (MSP) agreement’s scope is often billed T&M; know the rates before you need them. Buyers sourcing field support should compare dispatch and hourly rates, not only monthly fees.
- Large projects. For big projects, open-ended T&M can shift significant overrun risk to you; consider caps, phases or a fixed price once the scope is clear.
- Proposal comparison. When an RFP returns a mix of fixed and T&M bids, compare likely total cost, not just headline rates.
Questions to ask vendors
- What are your rates by role, and do they change for after-hours or urgent work?
- What minimum billable increments, travel charges or call-out fees apply?
- Are materials billed at cost or with a markup, and what needs our approval?
- Will you agree a not-to-exceed cap, and is it a hard limit?
- What detail will timesheets and invoices show?
- At what point could this work move to a fixed price?
How it differs from outcome-based pricing
T&M pays for inputs: hours, days and materials. Outcome-based pricing pays for agreed business results, such as costs reduced or issues verifiably resolved; a plain price per ticket or transaction is output pricing, not outcome-based. On T&M the buyer carries most of the delivery risk, and the provider typically earns more when work takes longer. Under outcome-based pricing the provider carries more of that risk and earns more when it delivers efficiently. T&M is simpler to set up and suits work that is hard to define; outcome-based pricing suits work with results both sides can measure and attribute.