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?
- Firm fixed-price (FFP)
- Time and materials (T&M) with a not-to-exceed ceiling
- Cost-plus-incentive-fee (CPIF)
- 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.
