Time and Materials Contracts UK: How They Work

What this document is

A time and materials contract (often shortened to T&M) is a pricing arrangement where the customer pays for two things: the labour hours the contractor records, charged at agreed rates, and the materials or goods supplied, usually at cost plus an agreed markup. There is no fixed total price at the outset.

Instead, the final cost depends on what the work actually requires once performed. These contracts are common in construction, engineering, IT services, and professional consultancy, particularly where the scope cannot be pinned down in advance. A T&M contract is still a legally binding agreement under English law, and the usual principles of contract formation, offer, acceptance, consideration, and intention to create legal relations all apply.

What makes it distinct is the open-ended pricing mechanism, which shifts some of the financial risk from contractor to customer while rewarding the customer with flexibility. Most well-drafted T&M contracts include cost controls such as hourly rate schedules, materials markup caps, a not-to-exceed ceiling, approval processes for variations, and clear reporting obligations so the customer can see where money is going week by week.

How to use this document

1. Define the scope as tightly as you can. Even though T&M contracts accommodate uncertainty, a vague scope invites disputes. Write down what you know, what you expect, and the boundaries of the engagement. List deliverables, locations, and any phases. The clearer the starting picture, the easier it is to spot when something falls outside the original brief and needs a separate instruction. 2. Agree rates, markups, and a cost ceiling. Set hourly or daily rates for each category of worker, from senior engineer down to labourer, and agree how materials will be priced, typically cost plus a percentage. Build in a not-to-exceed figure or a rolling budget cap that triggers a conversation before the contractor keeps spending. Without a ceiling, costs can drift well beyond what anyone originally envisaged. 3. Put reporting and record-keeping obligations in writing. The customer needs visibility over hours booked and materials purchased. Require weekly or fortnightly timesheets, receipts or invoices for materials, and a running total against the budget. Specify who signs off timesheets on site, and build in audit rights so you can inspect records if something looks off. Good reporting is the single biggest safeguard in a T&M arrangement. 4. Create a change control process. When new work is identified mid-project, there should be a documented way of agreeing it before the contractor starts. A simple variation instruction signed by both sides, noting estimated hours and materials, prevents arguments later. Decide in advance who has authority to approve variations and up to what value, so routine adjustments do not grind the job to a halt. 5. Deal with termination, disputes, and payment terms clearly. Set out when invoices are issued, how quickly they must be paid, and what happens if payment is late. Include a termination clause that lets either party exit on notice, with payment owed for work done up to that point. Choose a dispute resolution route, whether that is negotiation, mediation, or adjudication under the Construction Act for qualifying construction contracts.