What it means
When you hire a specialist for a project, you usually face a choice between a fixed price and paying for actual time and materials. A fixed-price contract works well when the exact scope is known.
However, when the scope is uncertain, contractors must pad their fixed bids to cover risks. Time and materials removes this guesswork by billing you strictly for what is consumed.
In practice, this means you receive regular invoices detailing the exact hours worked by each team member at agreed hourly rates, alongside itemised receipts for any physical components, software licences, or supplies purchased. This transparency builds trust, as you only pay for the exact effort required to complete the job.
The main benefit is flexibility. If your priorities shift halfway through the project, you can pivot the team without needing to renegotiate a complex change order.
You simply redirect their hours to the new tasks. The drawback is that total costs are uncapped, meaning you take on the financial risk if the project takes longer than expected.
To keep budgets under control, managers using this method typically set a not-to-exceed cap or require weekly progress reports. This ensures everyone stays aligned on how many hours are being consumed and prevents unpleasant financial surprises when the final invoice arrives.
Imagine hiring a handyman to renovate your kitchen. Instead of guessing a flat fee, you pay them directly for the exact hours they work plus the cost of the tiles and wood they buy.
If you decide to add a kitchen island halfway through, they just build it and bill you for the extra time.
In practice
Real-world examples
Example 1
A startup hires a freelance software developer to build a new mobile app. Because the exact feature list is still evolving, they agree to a rate of $50 per hour plus the cost of any paid plug-ins. After 200 hours and $400 of plug-ins, the invoice is 200 x $50 + $400 = $10,400.
Example 2
A local marketing agency hires a copywriter to update its client websites. It agrees to pay $40 per hour for writing and editing time, billed weekly based on actual hours tracked in a shared spreadsheet. A 25-hour week therefore costs 25 x $40 = $1,000.
Example 3
A manufacturing firm hires an engineering consultant to repair a custom production line. Because the fault is unknown, it pays $90 per hour plus the exact wholesale cost of any replacement metal parts. An 18-hour repair with $740 of parts costs 18 x $90 + $740 = $2,360.
Think of it
Imagine hiring a handyman to renovate your kitchen. Instead of guessing a flat fee, you pay them directly for the exact hours they work plus the cost of the tiles and wood they buy. If you decide to add a kitchen island halfway through, they just build it and bill you for the extra time.
Formula
Calculation
Total Cost = (Total Hours Worked x Hourly Rate) + Total Cost of Materials
Worked example: a developer works 40 hours at $60 per hour, which is $2,400. Software licences purchased cost $300. Total Cost = $2,400 + $300 = $2,700.
Compare that with a fixed bid. If the contractor expected 40 hours but quoted a fixed price with a 25% risk buffer, the labour element would be $2,400 x 1.25 = $3,000, so the client would pay $3,300 including licences even if the work took only 40 hours. If the work ran over to 55 hours, time and materials would cost 55 x $60 + $300 = $3,600, which is above the fixed bid. A not-to-exceed cap of $3,300 would protect the client in that case.Case study
Seen in the real world
This is a fictional, illustrative scenario. BrightWeb, a digital marketing agency, needed a bespoke customer portal built for a major client, but the full feature requirements were unclear at the kickoff meeting. Opting for a time and materials contract, BrightWeb agreed to bill the client $75 per hour for developer time, plus any direct software licensing fees. During the first month, the development team logged 120 hours and purchased $500 worth of secure database tools.
The client received a transparent invoice for $9,500. Because the client could see the exact tasks completed each week, they felt confident in the progress. In month two, the client decided to add a live chat feature. Instead of halting the project to renegotiate a new fixed-price quote, they simply directed the developers to spend 30 additional hours on the new feature.
The project finished in three months with a total cost of $24,500. That total was 320 hours at $75, which is $24,000, plus $500 of tools. While the final price was higher than an initial rough guess, the client received a fully tailored product without paying for inflated risk buffers. BrightWeb had also agreed a not-to-exceed cap of $28,000, so the client always knew the worst case.
Watch out
Common mistakes
- Failing to set a budget cap or ceiling, which can lead to runaway project costs if the work drags on.
- Not tracking or auditing the hours billed by contractors, trusting timesheets without checking actual deliverables.
- Using this model for projects with a strictly defined scope where a fixed-price contract would be safer and cheaper.
Questions
People also ask
When should I use a time and materials contract?
Use it when the project scope is uncertain, complex, or likely to change frequently as work progresses.
How do I protect my budget from getting out of hand?
Always include a maximum budget cap in the contract and require weekly progress reports detailing hours spent.
Do contractors make less money under this model?
Not usually. It guarantees they get paid for all the work they perform, eliminating the risk of underestimating fixed bids.