Are You Nuts? Exploring the Evils in T&M Work

By Coach Gary Micheloni

Why in the world would anyone do time and materials (T&M) work that is qualified as "not to exceed?" We might just as well call it, "T&M, not to succeed!"

Case in point: So there we were working away on our project, when the owner asked us to make a change to something - in other words, to do some "extra work" for him. What to do?

In our industry, when a change is requested, the contractor typically has two options, particularly when it comes to large commercial or public works: Either the contractor is asked to prepare a quote for the cost of the work, or the contractor is instructed to "proceed on a T&M basis." And since contractors are all about getting as much work as we can, we normally agree to do the work. But one of these ways is definitely better than the other.

Lots of contractors like lots of T&M work; it's easy to bid, since no bid is really required. Many of our clients prefer this kind of work, particularly when there are several unknowns to deal with.

Working with a quote, however, has two downsides. First, you need to take the time to prepare one. And second, the owner has to accept it, which can also take time. There is always the question of whether your quote is fair. Oftentimes, the client will grill you as to what your quote includes because it "seems high."

Most project documents provide that, in the event of potential extra work, the contractor is to prepare a proposal. However, they also say that, should the owner and contractor not be able to negotiate an agreed price, the work can be performed on a T&M basis. Most documents also require you, the contractor, to perform this work simply because the owner wants it done - you literally have no choice, particularly if it is remotely related to your scope of work.

Huddle up, team, because Coach is now going to tell you about a defense that the client may run on you: After having given your client a proposal, and your client tells you that it is too high, you are instructed to perform the work on a T&M basis. You think you are on your way to some easy work with a guaranteed profit, except that your client may actually send you something you don't want - a letter authorizing you "...to proceed on a T&M basis not to exceed X dollars." Consider "X" to be the dollar amount of your original proposal.

If you take the bait, you'll be watching the ball (X) and thinking that you are one smart contractor who really knows how to play the game. You got your price, sort of. But what did you really do?

You just obligated yourself to perform some work with not much upside and plenty of downside. How's that? If your T&M comes in less than X amount, your client loves you for saving him money. If it comes in more than X, you have just made a donation to your client's project, because you have agreed that the cost of your work "would not exceed!"

Here's Coach's rule: When it comes to T&M work, never accept it on a "T&M not to exceed..." basis. NEVER. NEVER. NEVER!

There's a corollary rule to this. When it comes to T&M work, the absolute best you can ever do is to break even. You say, "Coach, are you nuts? This is guaranteed money. Why wouldn't I want this work?"

Let's use a common example where you are to be paid cost, plus 15 percent. What can possibly go wrong? Plenty! I just said that the best you can ever do on this type of work is to break even! Why? Let's say your crew and your foreman work all day long on this task. At the end of the day, your foreperson writes up an extra work ticket, listing your five crewmembers and himself. Consider these four things:

Does the client smile when he sees that you expect to be paid for your foreman's time and his truck? Maybe.

Does your client sign the ticket "verify for hours only"? This is a way of signing a ticket, verifying that your people were onsite and performing work, but it's not actually approving the work! In other words, it might be negotiated later. Coach is not making this one up - this strategy is becoming prevalent among larger general contractors.

When can you bill for this work? Do you get a unilateral change order now - sort of an advance change order you can bill against this period - or will you have to carry these costs until the end of the job when the client will execute one final change order?

Even if everything is signed for, with a smile, you still have to collect the money, because the owner (in his or her own mind) may be thinking that there's still an opportunity to negotiate your fully authorized tickets before you're handed a check for the amount.

Once again, before you think that ol' Coach is exaggerating to make a point, let me ask you a question: How many times have you gone in to see your client with valid extra work tickets in hand - properly signed - and asked for a check or a change order, and your client begins the process of reneging? Raise your hand if you've ever heard this: "Wow, that's a lot of money" or, "Gosh, I didn't think it would be that much" or, "This is coming right out of my own pocket - what can you do to help me?" or, my all-time favorite, "How about we just split the difference?"

The other big "elephants in the room" to consider when doing all of this extra work:

Your liability insurance premium might be around two percent of your gross, so when you don't recover costs, you not only lose them, but you lose an additional two percent. Ouch!

Which is easier to bill? An agreed-upon, lump sum, line item of, say, $10,000, or $10,000 worth of tickets and receipts that you have to first justify to your client, get approved, and then assemble a billing for it? I know my preference!

And that's why this column is subtitled, "Exploring the Evils in T&M Work," because when you split the difference with your client, what you are giving away is profit from your own company. Remember, the cost is already there, and has been picked up by your firm. Being asked by a client to tear up your valid, extra work request makes as much sense as having an employer ask employees to tear up their own personal expense reimbursement requests for things they've paid out of your pocket to help the company. No legitimate employer would expect an employee to do that! That would be evil.

About the Author

Gary Micheloni is a working project manager, speaker, author, consultant and coach. He has severals years of industry experience, including a background as a licensed general engineering contractor. For further information and insight on the Full Contact Project Management approach, write Coach Gary at FullContactTeam@gmail.com.

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