Fixed Price vs Time and Materials: Which Construction Contract Pays You More

Most of the advice on this question is about risk, and it is broadly correct: fixed price puts the overrun on you, time and materials puts it on the client. Useful, but it does not answer the question contractors actually ask, which is which one leaves more money in my account at the end of this job.

So here is the same job, priced both ways, with the arithmetic shown.

The job is the kitchen and hall bath remodel built line by line in how to estimate a construction job. Its cost structure is what makes the comparison interesting:
Your own crew’s burdened labour (304 hrs @ $36.96) $11,235.84
Materials, subcontractors, equipment and general conditions $74,339.88
Direct cost $85,575.72
Overhead recovery (304 hrs @ $16.90) $5,137.60
Total cost $90,713.32
Fixed price at a 28% margin $125,990.72
Gross profit $35,277.40

Note the split before going further. Only 13% of the direct cost is your own labour. The rest is a cabinet package, five subcontracts and a dumpster. Hold on to that; it decides the whole comparison.

The Same Job, Billed by the Hour

A time and materials contract needs two rates: what you bill an hour at, and what percentage you add to materials and subcontracts. Here is the job under a range of both, against the fixed price of $125,990.72:

T&M structure Labour billed Materials and subs billed Total billed Profit Margin vs fixed price
$95/hr + 15% $28,880.00 $85,490.86 $114,370.86 $23,657.54 20.68% −$11,619.86
$105/hr + 15% $31,920.00 $85,490.86 $117,410.86 $26,697.54 22.74% −$8,579.86
$115/hr + 15% $34,960.00 $85,490.86 $120,450.86 $29,737.54 24.69% −$5,539.86
$105/hr + 25% $31,920.00 $92,924.85 $124,844.85 $34,131.53 27.34% −$1,145.87
$115/hr + 25% $34,960.00 $92,924.85 $127,884.85 $37,171.53 29.07% +$1,894.13

A $105 hourly rate is not a timid number for residential remodelling, and 15% on materials is not an aggressive addition. That combination bills $117,410.86 — $8,579.86 below the fixed price on identical work.

The reason is in the split above. Under a fixed price, overhead and profit are applied to the whole $90,713.32, subcontracts included. Under T&M they are applied to two things separately: a labour rate that only touches 304 hours, and a percentage that only touches materials. If that percentage is thinner than your real margin — and 15% is far thinner than 28% — then three quarters of the job is generating almost nothing.

To match the fixed price you need one of these:

Neither is outrageous. Both are considerably more than the defaults. That is the finding: on a sub-heavy job, conventional T&M rates quietly discount the work by several thousand dollars, and nobody notices because every invoice looks correct.

Where Fixed Price Actually Hurts

None of which makes fixed price the answer, because the table above assumes the job runs as estimated. Fixed price is a bet that it will. Two ordinary things that go wrong, priced against the same job:

Labour runs 10% over. 304 hours becomes 334.4. The extra 30.4 hours cost you $1,123.58 in burdened wages and $513.76 in overhead you can no longer recover elsewhere — $1,637.34 in total.

Fixed price T&M at $105 + 15%
Billed $125,990.72 $120,602.86
Profit after the overrun $33,640.06 $28,252.20
Margin 26.70% 23.43%

The fixed price absorbs the whole overrun and the margin falls 1.30 points. T&M bills the 30.4 extra hours at $105, so it collects $3,192.00 against $1,637.34 of extra cost and its profit actually rises by $1,554.66 — it is simply rising from a lower base, and still finishes $5,387.86 behind.

A subcontractor raises their price 8% after you have signed. The five subs on this job total $36,500, so that is $2,920.

Fixed price T&M at $105 + 15%
Billed $125,990.72 $120,768.86
Profit $32,357.40 $27,135.54
Margin 25.68% 22.47%

Fixed price gives up $2,920 and 2.32 margin points. T&M passes the increase through and even earns 15% on it.

So the honest summary of the risk trade is narrower than the usual framing suggests. Hit this job with both at once — a 10% labour overrun and an 8% sub increase — and fixed price still finishes ahead:

Both shocks together Fixed price T&M at $105 + 15%
Billed $125,990.72 $123,960.86
Profit $30,720.06 $28,690.20
Margin 24.38% 23.14%

It would take considerably worse than that — the kind of overrun that comes from undefined scope rather than ordinary slippage — before T&M wins on money as well as on safety.

Which To Use

Use fixed price when Use time and materials when
The scope can be drawn and taken off Scope is genuinely unknown until walls are open
Finishes are selected, or have a stated allowance Selections are undecided and the client wants to browse
Much of the job is subcontracted or bought in Most of the job passes through your own crew’s hours
The client is comparing bids and wants certainty The client is repeat, trusts you, and wants the cheapest route
You have costed similar work before Fire, water, structural or historic work

Two practical notes that sit underneath that table.

The third row is the one worth dwelling on. The higher the share of a job that is subcontracts and material packages, the worse T&M pays at ordinary rates — because those packages only ever earn their thin percentage. A job that is mostly your own crew swinging hammers is where hourly billing holds its own.

Undefined scope does not have to mean T&M. The middle path is a fixed price on the defined scope plus a stated allowance for the unknown part, reconciled at cost when it is opened up. You keep the certainty the client is buying, and you stop bidding against an unopened wall.

Whichever you choose, the estimate still has to be built the same way — line by line, labour in hours, waste and tax on materials, overhead per billable hour. T&M does not remove the need to estimate. It removes the need to be right, which is a different and much smaller privilege than it sounds.

Related Reading

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Frequently Asked Questions

Is time and materials better than fixed price for a contractor?

It is safer, not automatically better paid, and on a subcontractor-heavy job it is usually worse paid. The remodel worked on this page prices at $125,990.72 fixed. Billed at $105 an hour plus 15% on materials and subs it comes to $117,410.86 — $8,579.86 less — because only 304 of the job's hours are your own crew while $74,339.88 of it is materials and subcontracts carrying a thin percentage. T&M shifts overrun risk to the client; whether it pays more depends entirely on how much of the job passes through your hands as hours.

What markup should I charge on materials under a time and materials contract?

Enough that the non-labour part of the job still carries its share of overhead and profit, which is and 10 to 15 per cent is frequently not enough — on the job worked below it is not. On the worked job, matching the fixed price would need either 26.54% on materials and subs at a $105 labour rate, or a $133.22 labour rate at 15% on materials. Pick your two numbers deliberately and check them against what the same job would have earned fixed, rather than adopting a convention.

When should a contractor use a time and materials contract?

When the scope genuinely cannot be defined: renovation behind finishes that have not been opened up, structural repair, fire or water damage, historic work, or anything where the plans stop at a wall nobody has looked behind. Quoting a fixed price on undefined scope means either padding it until you lose the job or absorbing the discovery yourself. T&M is also common for small additional works alongside a fixed-price main contract.

Who takes the risk on a fixed price contract?

You do, in both directions. If the job runs 10% over on labour, the worked example drops from a 28.00% margin to 26.70% and you absorb $1,637.34. If a sub raises their price 8% after you have signed, you absorb $2,920 and land at 25.68%. The compensation is that efficiency is yours to keep: finish early, buy better, sequence well, and the whole gain stays with you — which under T&M it does not.

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