Filling out a time and materials contract comes down to replacing every blank, range, and placeholder with specific, agreed numbers and language: name the parties and project, describe the scope even though it’s open-ended, list each labor category with a fixed hourly billing rate, state the material markup as a single percentage, set a not-to-exceed ceiling, and lock down payment terms, insurance, change orders, records, and dispute resolution before anyone signs. The sections below walk through each part of the form in the order you’ll complete it.
Before You Start: Is This the Right Form?
A T&M form is built for jobs where the scope can’t be pinned down in advance — gut renovations, insurance restoration, mechanical or electrical retrofits in older buildings, and professional services where effort depends on what the team finds. If you can define the work precisely enough to collect competitive fixed-price bids, a T&M form is usually the wrong choice because it shifts more cost risk onto the owner. Assuming the fit is right, move to the form itself.
Parties, Project, and Scope of Work
At the top of the form, enter the full legal names, addresses, and license numbers of the contractor and the owner, plus the project address and a short project title or number. License numbers matter: if the contractor isn’t properly licensed in the jurisdiction where the work happens, enforcement of the contract can become difficult.
The scope section is where most T&M forms are underwritten. Even though you chose this form because the scope isn’t fully defined, write enough detail to establish boundaries. Describe the tasks the contractor will perform, and spell out what falls outside the agreement. Vague scopes become disputed scopes once invoices start arriving.
Labor Categories and Billing Rates
Build a table listing every worker category that might show up on the project and assign each one a fixed hourly rate the owner will be billed. Use specific titles: apprentice, journeyman electrician, operating engineer, foreman, superintendent, project manager. Labels like “worker” invite disputes.
The billing rate is not the worker’s wage. It wraps in payroll taxes, workers’ compensation insurance, benefits, supervision, general and administrative costs, and profit. That overhead markup can reach 50 percent or more of the underlying cost, which is why a laborer paid $22 an hour might appear on the invoice at $35 to $45, and a licensed electrician or plumber can bill at $100 or higher. Federal T&M contracts require “separate fixed hourly rates that include wages, overhead, general and administrative expenses, and profit for each category of labor.”1Acquisition.GOV. FAR 16.601 Time-and-Materials Contracts Follow the same approach on private jobs. Once signed, these rates don’t change without a written amendment.
If the labor table includes workers who are independent subcontractors rather than the contractor’s employees, say so on the form. The IRS evaluates worker classification on behavioral control, financial control, and the type of relationship between the parties.2Internal Revenue Service. Independent Contractor (Self-Employed) or Employee? Misclassification exposes the contractor to back taxes and penalties. If you’re the owner, confirm that the contractor carries workers’ compensation covering its crew before anyone sets foot on site.
Material Costs, Markup, and Sales Tax
In the materials section, require the contractor to provide copies of supplier invoices so the owner can verify actual costs. Then state the markup percentage the contractor adds on top of those invoice costs as a fixed number, not a range. Residential material markups commonly run between 25 and 50 percent; commercial projects may carry lower markups depending on volume. Whatever you agree to, write one number into the form so there’s no room for creative math on individual line items.
Under the Uniform Commercial Code, when a contract leaves a price open or ties it to market conditions, the standard is a “reasonable price at the time for delivery,” and a price set by either party must be fixed “in good faith.”3Legal Information Institute. UCC 2-305 Open Price Term A material markup grossly exceeding industry norms could face a legal challenge as unreasonable. Writing the agreed percentage into the signed form largely eliminates that risk.
Sales tax treatment on T&M materials varies by state. In some states, the contractor is treated as the final consumer of the materials and pays sales tax at purchase, so no separate sales tax line appears on the owner’s invoice. In others, the material charges are a retail sale to the owner, making the owner responsible for sales tax. Check your state’s rules before completing the pricing section, because the answer affects how you structure the material cost provisions.
The Not-to-Exceed Ceiling
The not-to-exceed (NTE) ceiling is the single most important financial protection for the owner. Enter a hard dollar cap on total billings. Base the figure on your best estimate of the project’s cost, then add a reasonable contingency — 10 to 20 percent is a common buffer for projects with moderate uncertainty. Too low and you’ll process change orders constantly; too high and the ceiling provides no real protection.
Pair the ceiling with a notice clause. Federal rules require the contractor to notify the contracting officer when the next 30 days of charges, added to all previous charges, will exceed 85 percent of the ceiling. The contractor isn’t obligated to continue performance beyond the ceiling, and the government isn’t obligated to pay above it.4Acquisition.GOV. FAR 52.232-7 Payments Under Time-and-Materials and Labor-Hour Contracts Mirror this on private contracts. Require written notice when charges reach 75 or 85 percent of the ceiling, and state clearly that any work performed above the ceiling without a signed change order is at the contractor’s own risk.
Payment Schedule, Retainage, and Late Payment
Set an invoicing frequency: most T&M contracts use biweekly or monthly billing. Specify what each invoice must itemize — hours worked by labor category, materials purchased with supplier receipts attached, equipment charges — all tied back to the rates in the contract.
Enter a retainage percentage. The prevailing range across states that regulate retainage is 5 to 10 percent of the contract amount or progress payment. Several states cap retainage at 5 percent, and a growing number require the withholding percentage to drop once the project reaches 50 percent completion.5ConsensusDocs. Its My Retainage and I Want It Now – Fundamentals To State when retained funds will be released, typically within 30 days after final approval of the work.
Fill in the number of days after invoice submission that payment becomes due (30 days is common) and the interest rate that applies once a payment is overdue. Many states have prompt payment statutes imposing interest on overdue construction invoices. The federal Prompt Payment Act interest rate for January through June 2026 is 4.125 percent.6Bureau of the Fiscal Service. Prompt Payment Writing a specific late-payment rate into the contract removes ambiguity.
Lien Waivers
If you’re the owner, require the contractor to submit a lien waiver with each progress payment. Waivers come in four types: conditional and unconditional versions for both progress payments and final payment. A conditional waiver takes effect only after payment clears; an unconditional waiver takes effect immediately upon signing.7AIA Contract Documents. Lien Waivers and Payment Bond Releases in Construction Specify conditional waivers on progress payments so you don’t release lien protection before the money actually changes hands.
Insurance Requirements
In the insurance section, identify the types and minimum amounts of coverage the contractor must carry before work begins. The three coverages that appear on most construction forms are:
- Commercial general liability (CGL), which protects against third-party claims for bodily injury or property damage arising from the work. Many states require CGL as a condition of licensure.
- Workers’ compensation, which covers medical expenses and lost wages for employees injured on the job. Nearly every state mandates this for employers.
- Builders risk, which covers the structure itself during construction against fire, weather, vandalism, and theft. Specify whether the owner or the contractor procures this policy.
Require certificates of insurance before the start date and name the owner as an additional insured on the CGL policy. Add a clause giving the owner the right to suspend work if coverage lapses mid-project.
Change Order Procedure
Scope changes are the norm on T&M projects, but changes that affect the ceiling price, the timeline, or the nature of the work should still move through a formal change order. Fill in the change order clause with the procedure: how requests are submitted, who has authority to approve them, and what happens if work proceeds before written approval.
Each change order should identify the project and original contract, describe the altered work, state the cost impact and any adjustment to the NTE ceiling, note the schedule impact, and carry both parties’ signatures before the changed work begins. Without a written clause, you’ll end up arguing about whether a conversation on the job site constituted authorization to spend more money.
Record-Keeping and Audit Rights
Because the owner pays based on actual hours and actual material costs, both parties need a documentation system that can support every line item on every invoice. Specify in the form that the contractor will maintain individual daily timekeeping records and records verifying that employees meet the qualifications for the labor categories listed in the contract.4Acquisition.GOV. FAR 52.232-7 Payments Under Time-and-Materials and Labor-Hour Contracts For materials, require that every supplier invoice, delivery receipt, and return credit be kept and made available.
Include an audit clause giving the owner or the owner’s accountant the right to inspect project-related financial records on reasonable notice. Federal rules allow the government to withhold up to 5 percent of amounts due, capped at $50,000, until the contractor delivers a final voucher release.4Acquisition.GOV. FAR 52.232-7 Payments Under Time-and-Materials and Labor-Hour Contracts Owners can negotiate a similar holdback tied to delivery of complete project records at closeout.
Set a retention period in the form so neither party discards records prematurely. Federal contractor records under the FAR must be available for at least three years after final payment.8Acquisition.GOV. Contractor Records Retention The IRS generally requires records supporting a tax return to be kept for three years from the filing date, or six years if income is underreported by more than 25 percent.9Internal Revenue Service. Topic No. 305, Recordkeeping Many construction practitioners keep project files for the length of the applicable statute of repose in their state, which often runs six to ten years.
Dispute Resolution
Billing disputes on T&M contracts follow predictable patterns: the owner questions whether billed hours match hours worked, challenges material markups, or disputes whether specific work fell inside or outside the agreed scope. Fill in a resolution path before any of these arguments arise.
Most construction contracts choose among three options. Mediation is a voluntary, non-binding process where a neutral third party helps the sides negotiate. Arbitration is a formal proceeding where one or more arbitrators issue a binding decision that is difficult to appeal. Litigation is a court proceeding with discovery, trial, and appeal rights, but it’s the slowest and most expensive. Many forms require the parties to attempt mediation first, then move to binding arbitration if mediation fails. Whatever structure you choose, write it into the form. Courts generally enforce the dispute resolution method the parties agreed to.
Stop Work and Termination
Complete two more clauses before signing. A stop-work clause gives either party the right to suspend operations under defined circumstances — most commonly non-payment by the owner, safety violations on site, or a failure to maintain required insurance. State how quickly work must stop after notice, who bears the cost of the idle period, and how the project restarts once the triggering issue is resolved. Written confirmation is what makes the clause reliably enforceable.
A termination-for-convenience clause allows either party to end the agreement without proving the other side breached it. The contractor is still owed for hours worked and materials furnished through the termination date, plus reasonable demobilization costs. Courts scrutinize these clauses under the covenant of good faith, so using a convenience termination as a pretext to avoid paying for completed work may make the clause unenforceable. Specify a written notice period (7 to 30 days is common) and describe how the final accounting will work after termination.
Signing and Attaching Exhibits
Once every section is filled in and both parties have reviewed the complete document, sign. Electronic signatures through platforms like DocuSign are generally valid for construction contracts under the federal ESIGN Act and the Uniform Electronic Transactions Act, with narrow exceptions for wills, certain family law documents, and court orders. If you use ink, have both parties sign the same physical copy rather than passing separate signature pages, which creates confusion about which version of the document was actually agreed to.
Attach the completed labor rate table, insurance certificates, and the initial scope description as exhibits to the signed form. These attachments are part of the contract. If they’re referenced in the body but not physically included, enforcing them later becomes harder. Each party should receive a fully executed copy with all exhibits before any work begins on site. From that point forward, the form is the baseline against which every invoice, change order, and dispute is measured, and the contractor’s daily timesheets and material receipts are the paper trail that either confirms or contradicts the charges on each billing cycle.
If you prefer not to draft from scratch, the AIA publishes standardized forms covering most of these terms with pre-drafted language. The AIA A102 is designed for agreements where the owner pays the cost of the work plus a fee, subject to a guaranteed maximum price,10AIA Contract Documents. AIA Document Comparisons which closely mirrors how most private T&M contracts operate. These forms save drafting time, but read every clause before signing — pre-printed language can contain obligations you didn’t intend to accept.