Companies use Time and Materials Contracts (“T&M Contracts”), also called “Cost Plus Contracts,” when they want to make sure their costs are covered. T&M Contracts provide that companies are paid for their direct costs plus a markup for overhead and profit. If construction costs increase or the project scope becomes larger than expected, the company keeps working and the customer keeps paying unless a “not-to-exceed amount” is agreed on. Under a T&M Contract, the customer bears the risk of cost overruns, but some customers prefer them because they provide cost transparency. Many contractors use T&M Contracts  when it is difficult to provide an accurate estimate, a need for flexibility exists or the project’s scope is expected to change during the construction process. In some states such as California, T&M Contracts are allowed only for commercial projects. See our blog post "Expanding Your Contractor Business: Time & Materials Contracts" for more information about this important topic.