Time and Materials Contract? Watch Out!

When you hire a contractor to build a home for you, you generally have two options for pricing the project. One of those options, a fixed-price contract, provides all parties with transparency as to the total cost of the build, presuming you have a properly drafted construction contract. Another pricing structure, which has grown in popularity, is a time and materials contract. Under this structure, the owner is billed for time and materials actually incurred on the project, plus a percentage to cover a builder’s overhead and profit. Theoretically, this pricing structure provides transparency to the owner about the actual cost of the build, for the contractor should provide the owner with full supporting documentation for every time and materials invoice.

But beware. The time and materials contract also offers a mechanism for an unscrupulous contractor to “pad” the bills, or to invoice the owner for labor and materials performed on other construction projects. Such a scheme is relatively easy to hide from the owner because a dishonest contractor can easily create dummy invoices to support the charges.

How do you protect yourself? First, do your research. Contact other clients of the builder to ensure they were happy with the process and the result. Check the website for the North Carolina Licensing Board for General Contractors to ensure your contractor has the proper license (not just a license) to undertake your construction project. Second, get at least three bids for your project. These bids should provide you with sufficient information to determine the average cost to construct your home or complete your renovation. Third, decide either on a fixed price contract based on your bids or, if the contractor insists upon a time and materials contract, you must insist on a maximum guaranteed price. This price will be the maximum amount you will pay for the project, unless there are mutually agreeable written change orders. Finally, you should have a competent construction attorney review the contract before signing, because the contract is an important document that should clearly set forth the parties’ respective rights and obligations, but will also contain several provisions that will restrict your rights in the event something goes awry.

Building a primary residence or a retirement home in our beautiful mountains should be a pleasant experience, but it can easily turn into a costly nightmare if you don’t properly prepare. Hiring a construction lawyer to help protect you in advance, rather than having to hire a lawyer to litigate for you after disaster strikes, reminds me of the famous Fram oil filter slogan: “pay me now or pay me later.”