This is a Time and Materials Contract (“T&M Contract”) where a contractor gets paid for their direct costs plus a markup for overhead and profit. This T&M Contract, also called a “Cost Plus Contract,” requires the owner to bear the risk if things go bad. Under this contract, if construction costs go up or the project scope is revealed to be larger than expected, the contractor keeps working and the owner keeps paying unless the parties have agreed on a “not-to-exceed amount.” T&M Contracts can be used when it is difficult for the contractor to provide an accurate estimate, when there’s a need for flexibility or if the project’s scope is expected to change often during the course of construction. In California and some other states, T&M Contracts are allowed only for commercial projects, but not for home improvement contracts. On commercial projects, at times a T&M Contract is ideal for a project owner because it provides transparency into the construction costs. Contractors can benefit from the immediacy of their work and revenue recognition. They are also guaranteed to recover any expenses and earn a profit. When using this T&M Contract, aspects that can be negotiated include the labor rate, material markup, not-to-exceed amount, maximum labor hours and what qualifies as billable hours, such as the possibility of transportation to and from job site and time purchasing materials.