A time and material change order is an agreement to pay for whatever the work turns out to cost. Sometimes that is the only sensible instrument available. What makes it expensive is that it is frequently used where a lump sum was perfectly possible, and almost never carries a ceiling.
Why it exists at all
Some work genuinely cannot be priced before it is done. Opening up an existing structure to find out what is behind it. Repairing damage of unknown extent. Responding to a condition discovered during excavation while the excavator is standing there.
In those situations a lump sum would be a guess with a large contingency inside it, and the owner would pay that contingency whether or not the risk materialized.
A time and material change order removes the guess. The contractor records labor hours, material, equipment and applies the contractual markup, and the owner pays actual cost.
That is the honest case for it and it is a good one. On genuinely unknown work, time and material is usually cheaper for the owner than a priced alternative.
The problem is the drift. Work that could be priced gets done on time and material because it is faster to authorize, because the design is not quite settled, or because nobody wanted the argument about the lump sum. And once the mechanism is running, there is no natural point at which it stops.
What a time and material change order removes
Three disciplines disappear the moment work moves onto this basis, and owners underestimate all three.
The incentive to be efficient. Under a lump sum the contractor keeps the benefit of doing the work quickly. Under time and material it does not, and the markup means a longer job earns more. This is not an accusation of bad faith. It is simply the absence of a reason to hurry.
The scope boundary. A lump sum defines what is included. Time and material defines a method of payment, not a scope, so work that is adjacent to the change tends to be absorbed into it.
The estimate as a check. With a priced change the owner can test the number against an independent view before authorizing. With time and material there is nothing to test until the money has been spent.
The cumulative effect across a job with twenty time and material changes is substantial, and it is invisible in any individual one.
The four controls that bound it
A not to exceed figure. The single most important control and the one most often omitted. The contractor estimates the work, adds a margin for uncertainty, and that becomes a ceiling. Work stops at the ceiling unless the owner authorizes more. This preserves the flexibility of time and material while capping the exposure.
Daily signed records. Labor by name and hours, equipment by unit and hours, material by quantity, signed by an owner’s representative each day. Reconstructing this at the end is impossible and disputing it at the end is worse.
An agreed rate schedule. Hourly rates by trade, equipment rates and markup, agreed at signature rather than presented with the first change. Rates presented after the work has started are not negotiable in any real sense.
A conversion trigger. Once the unknown becomes known, the balance of the work converts to a lump sum. On an opening up exercise this can happen within days, and it returns the efficiency incentive for the bulk of the work.
Together these four keep the instrument useful and stop it from becoming an open account.
A worked example
Illustrative figures. Not taken from any client project and not a quotation.
An occupied office renovation. Existing conditions behind the ceilings are unknown and the contractor proposes time and material for investigation and remediation.
That is the correct instrument for the investigation. It is authorized with no ceiling and no conversion trigger.
The investigation takes four weeks and establishes the conditions on all four floors by week two. The remediation continues on time and material for a further eleven weeks.
Final cost $1.02 million. An independent view afterwards puts the same scope, priced as a lump sum once conditions were known at week two, at approximately $610,000.
The difference of roughly $410,000 is not overcharging. The daily records are accurate and the rates are contractual. It is the cost of running eleven weeks of known work on a payment mechanism designed for unknown work.
A conversion trigger at week two would have removed most of it, and it is one sentence in the authorization.
Reading the daily records without living on site
Owners often assume that signing daily tickets requires a full time presence. It does not, but it does require somebody.
The practical arrangement is that the owner’s representative signs the tickets as a record of what was observed, explicitly not as agreement to the cost. That distinction should be printed on the ticket.
Where nobody can attend daily, three checks catch most of what matters. Compare the labor hours claimed against the manpower reported on site that day in the daily report, which is a document the contractor produces anyway. Compare equipment hours against equipment actually mobilized. And look at the ratio of supervision to labor, which on a small time and material operation is frequently higher than on the base contract.
None of that is forensic. It is arithmetic on two documents that already exist, and it takes twenty minutes a week.
The markup applied on top is a separate question, and it compounds in the same way described in the markup charged twice.
When to insist on a lump sum instead
Three tests decide it, and they can be applied in the meeting where the change is raised.
Is the scope definable today. If somebody can describe what is to be done in two sentences, it can be priced.
Is there time to price it. A two day pricing exercise on a change that is not urgent is always worth it. On a change blocking the critical path, it may not be, and that is a legitimate reason to proceed on time and material with a ceiling.
Is the uncertainty about quantity or about method. Uncertain quantity can be handled with a unit rate, which keeps the efficiency incentive. Uncertain method is the case where time and material genuinely belongs.
A unit rate is the instrument owners forget. It prices the work per unit, agreed in advance, and pays for whatever quantity turns out to be needed. On repetitive work of unknown extent it is better than both alternatives, and it is usually available.
Unit rates are also worth agreeing at signature for the handful of things most likely to arise: rock excavation, unsuitable material removal, additional piles, extra fireproofing, added concrete. Five rates on a page, negotiated while the contractor is competing, remove five future arguments.
An owner who has those rates rarely needs time and material at all, except for the genuinely unknown, which is what it was designed for. That is the reasoning behind reading the whole change machinery before signature rather than clause by clause during the job, as in claim vs change order.
What we do
We agree the rate schedule, the markup and the record keeping requirements before signature, and we write in the not to exceed and conversion requirements so that they apply automatically rather than being negotiated on each change. Then we say which kinds of work on your project are likely candidates. That is part of the cost and change exposure assessment. When the signing date is already close, the Rapid GMP Review covers the largest of these exposures in five to ten working days.
Questions people ask
Is a not to exceed figure binding on the contractor?
It binds the owner’s obligation to pay, which is what matters. The contractor is not obliged to complete the work within it, but must stop and seek authorization to exceed it. That stop point is the control, because it forces a conversation while the money is still unspent.
What markup is reasonable on time and material?
Whatever the contract says, which is why it must be agreed at signature. Rates presented with the first change have no competitive pressure behind them. What matters as much as the percentage is whether it compounds through tiers, since a markup on a markup is a materially different number.
Can an owner audit time and material costs afterwards?
Only with an audit right, and only against records that were kept. An audit right agreed at signature is worth having. It is worth much less than daily signed tickets, because an audit confirms what was recorded and cannot establish what was actually done eleven months earlier.
This is general information about construction contracts and is not legal advice.