Who Pays for Mistakes in a Time and Materials Contract?comments (2) September 15th, 2010 in Blogs
Builders have two basic options when it comes to contracts with their clients: a time-and-material arrangement, in which the client agrees to pay an hourly rate plus cover the cost of materials until the job is done, or a fixed-price contract in which a flat price covering everything is negotiated at the outset.
Mistakes on the builder's part, large or small, are likely crop up. With a fixed-price contract, there's no question the builder has to back up and make any necessary corrections on his own. But what about a T&M contract? Should the homeowner be expected to pay for corrective measures? That's the focus of this week's Breaktime Business Spotlight.
In a recent post, Ben asks for guidance on this potentially ticklish question. His own approach is not to charge for mistakes that were "stupid or unprofessional," but to charge the customer to correct mistakes he made when he was being "reasonably careful."
"Any thoughts on this one?" Ben asks. "Also, does anybody know of a credible resource that defines a T&M agreement and describes, in detail, what's billable in a T&M situation, and what is not? I'm thinking that I might need to refer a client to such a document."
From the homeowner's point of view
It all depends on what you consider "reasonable," replies Aimless.
"I'm sure that when my contractor cut off the old 4-in. cast iron vent and left it in the ceiling, he honestly didn't realize that it was now a funnel for rainwater into our house," Aimless says, "or that it was unsupported and would come crashing through the brand new drywall.
"It was an honest mistake. But from my perspective, the idiot should have known better and I seriously resented the T&M for them to fix and paint the drywall, plus the fact that I could see the patch. I fixed the roof myself."
That wasn't the end of his problems. Some tile work had to be ripped out and redone because the tile installer and plumber weren't communicating. Aimless paid for that, too.
"The result? The contractor got paid in full for T&M," he says. "Neither he nor those subs ever crossed my threshold again. Nor did they cross the threshold of anybody that I know."
Many builders think the practice is defendable
"Essentially I want to be paid for any and all time spent on a project since there are only so many productive hours in a day and I work to have zero down time," writes Idaho Don. "The more time I have off the clock the more I'd have to raise my rates to cover it."
Don tells customers who don't want to pay for "rework" that if he does everthing perfectly, eliminating the possibility he'll have to go back and fix something, his hourly rate will have to be higher. Paperwork and miscellaneous time he spends on documenting rework would have to be picked up by the customer.
"In the end I've never had a client agree that the normally small amount of rework was worth going through the hastle of separating it out," he says.
DesignBing uses a lawyer as an example of how the system works:
"All of their time is billed as T&M," Bing writes. "So if they have to make changes in a contract for you because they didn't have a clear understanding of the situation, they still bill you for the time in correcting their errors. Seems to me to be a logical example relevant to our work where misunderstandings and miscommunication are generally the cause of rework."
Contractors who don't charge
Cliff argues that pros shouldn't be making big mistakes on the job, adding, "and if you do, you should cover the expense of fixing the mistake. And you should have a certain amount of rework factored into your hourly rate, to cover little mistakes."
Hourly rates also should cover the unexpected "bad stuff" that's not a mistake on the builder's part but still requires time and money to fix.
For example, Cliff writes, suppose he's hired to install 10 recessed lights in a finished family room. Even with reasonable care, he finds a cable or gas line in the ceiling afer drilling a few holes, so he has to change the light layout and start over. It happens, but he's not going to charge the customer.
"I shouldn't expect the client to pay for my time to deal with it," he says. "I'll make money on the job, but not as much as if I'd been more careful and used an inspection scope to check clearances."
What if one of the lights he installs is defective? He can easily get a replacement from the supply house, but he'll eat the labor in making the switch.
"I can see a lot of similar instances with the other trades," he says. "A countertop installer makes a bad (too short) cut on a solid-surface countertop. Would you expect the client to pay for that mistake? If I were the client, I sure wouldn't want to pay...I'm paying you to do things right."
Dave Richeson makes a similar observation:
"Not every decision you make is going to be perfect, but the client hired you because you are a professional, and are expected to have a higher level of competance in making such decisions than them," he says. "Expecting them to pay twice for work or damage that is the result of your bad decisions is generally frowned on by most civil courts."
Let the contract help
As did several others, Dave suggests the contract between builder and client is the place to spell these issues out clearly.
"If you are the general contractor and don't fully diclose what is biilable hours in your contract, shame on you," he writes. "The only source that I know to define T&M is your contract and scope of work."
IdahoDon agrees: "The contract can include whatever you want," he says. "In the case where it isn't included you are at the mercy of what's 'reasonable.'
"I tell clients that all my hours related to a project are billable, including all rework that come up. If you aren't charging for all your time then you need to charge extra to cover yourself on these things."
A time and materials contract suggests the homeowner bears a certaiin amount of risk even under the best of circumstances, while a flat-rate contract puts the risk squarely on the builder. And as Mathewson points out, homeowners can get those things mixed up.
He recalls a job for which he'd given the customer a bid. Part way through the job, the customer asked about Mathewson's hourly rate and how much more time he thought the job might take.
Mathewson writes: "The sharp fellow that he was added it up and noted it was a fair bit less than the bid. He then started working on me to shift to T&M. I told him the bid was my best guess of what the job would cost, not a perfect no mistake job. I relented and switched to T&M.
"Long story short: With the usual problems and delays it ended up costing almost 10% more than the bid. When he mentioned the finial price I told him on a fixed bid I take the risk on T&M you do. You wanted to gamble and you did."
An Expert Weigs in:
At the extremes, the builder pays for ALL mistakes in a lump-sum contract and pays for NONE of the mistakes with T&M. In the real world, however, negotiations occur in most cases whenever a mistake is made. For that reason, it is important that you understand the differences between the contract types and then convey those differences to the clients so that they know in advance the risks and costs associated with each and then select the contract most appropriate for their home.
While I am no lawyer and certainly not one schooled in construction law, I do know the following: the main reason margins are higher in lump-sum contracts over fixed-price contracts is because the builder assumes greater liabilities in fixed contracts. Those liabilities and risks include, but are not limited to, materials price increases, incorrectly ordered material quantities, and other mistakes of all possible types. We explain up front to our clients that if they want to be insulated from those variables and possible cost increases then lump-sum pricing is for them. If, however, they would prefer to “save money,” they can hire us as their agent to build their home. We will do so for T&M (still 20% in this economy), but we will not be responsible for theft, incorrect orders, price increases, and other mistakes.
Is it that simple? Of course not. After all, we have a professional obligation that prohibits our being negligent. But if we put up security fencing and a lockbox on the house and someone breaks in and steals the tile, we will not pay for it under T&M. If the tile man does not order enough tile and wants to bill extra, we will work on the clients behalf to ensure they do not pay extra, but in no case will we pay the difference. There can be many examples that are less clear, and I understand that.
Communication and negotiation are an art. But I hope you understand and you make sure your clients understand that with T&M, the sky is the limit, and they better be prepared to self-insure for mistakes made on the job, because you will not be responsible for those mistakes.
posted in: Blogs, business