I initially thought of titling this column “T&M–Is it For You?” but after looking at it for 30 minutes I realized such a start was disingenuous. My actual goal is to convince you that in most cases T&M is a risky proposition.
T&M, time and materials, Cost Plus or more recently “open book” are all fundamentally the same kind of contract: The client pays only for work done, materials installed and the labor to install. The client has access to the vendor and trade contractor invoices plus the employee timesheets. “Transparency” is the watchword here.
Additionally, the client pays an agreed-upon contribution to overhead and profit. These dollars–essential to the success of any company–can be defined in many ways. The bottom line is that the customer thinks they’re protected–they only pay for what they get and they get to see the costs.
Before we jump into why I think this is a bad idea, let me tell you what goes through my mind when any remodeler tells me they “work on T&M.” Such a remodeler:
- Is often immature and believes this a standard model.
- Doesn’t know how to accurately estimate job costs and relies instead on a long list of “allowances.”
- Doesn’t understand the important difference between mark up and margin.
- Needs to get the job started immediately for cash flow.
- Competes against bidding factories–those who sell the job at or below true costs just to get the work.
- Hasn’t differentiated the firm from others in the marketplace;
- Has or soon will be stuck with a large uncollectible at the end of the job, which might put it out of business.
- Often takes a long time to prepare bills and then sends out bills haphazardly, often long after the costs have been incurred.
T&M makes more sense for companies that work on a high volume/low margin model and have to generate more than $10 million in volume to pay bills and generate sufficient profits
But for most remodelers, T&M only postpones difficult conversations–from the initial sales conversation about the merits of your company and the costs to the end of the project about, again, your costs. And at the end, the client has the control, not you.
Let’s compare weak companies leaning on T&M to mature, successful remodeling companies that work on the fixed price model.
- Fixed-price companies operate somewhere between 28 and 40% gross profit margin. Doing so means they have mark-ups between 40% and 62%. It is nearly impossible to obtain that kind of mark up on T&M.
- They don’t bid most of their jobs. Rather, they are the preferred remodeler and often work together with the client and architect or designer (if design is not in house) to develop a scope of work which matches the client’s budget as well as design needs.
- Fixed price companies insist on complete plans and specs capable of being built, not a drawing on the back of a napkin.
- They bill frequently based on contract provisions, and work to maintain an over-billing position during the first 60% of the job.
- Good firms manage infrequent change orders immediately and well. They don’t start work until the change order is estimated, signed by the client and in many cases paid completely;
- They rely on the company reputation in the community to dispel potential client fears.
Now, what model should your company follow?