Entering into a Time and Materials Contract

A Time & Materials Contract , as the term suggests takes care of the requisite supply within the specified time period.

A Purchaser probably prefer fixed price service contracts.



In those, if the service requires more time or material than planned, the supplier's profit is reduced, not yours. Sometimes, a supplier will refuse such risk and will insist on using a time and materials contract.

In a time and materials contract,
you pay the supplier for the number of hours actually required to perform the service.

So, the supplier has no incentive to minimize the number of hours expended on the service. The less efficient the supplier is, the more money it makes!

Purchasers often feel that using a time and materials contract is like issuing a blank check. But it doesn't have to be. You can negotiate these items to control final pricing :

1.Labour Rate. Suppliers not quoting fixed prices may charge "list price" for labor. If you are a big company or are sourcing a big project, don't pay list price. Negotiate a lower labor rate to reduce your total cost.

2.Maximum Number of Labor Hours. Experienced suppliers should be able to estimate the hours needed for a job.

Negotiate a cap on the number of hours where, if the supplier exceeds that number of hours, you don't pay for the overage. This avoids the "less efficiency = more money" issue of time and materials contracts.

3.Mark-Up on Materials. When billing for a time and materials contract, the supplier usually calculates the materials cost by adding a markup (usually 15 – 35%) onto the prices it paid. If a supplier paid $1,000 for materials, it will bill you about $1,200. You can ask the suppliers to charge only what they paid for materials, with no markup.

4.Not-To-Exceed Total. The next best thing to a fixed price contract is a time and materials contract with a "no price escalation" clause. Under this arrangement, the supplier can charge you for its labor and materials up to a certain maximum.

If the time and materials costs exceed that maximum, the supplier charges you the escalated amount and assumes the excessive costs. This offers incentive for the supplier to work efficiently and helps you provide a good estimate for your

internal customer’s budget.

 Articles on Materials Management.....

Management's expectations From Purchasing
Crisis in Purchasing & emergency Planning

Negotiation Questions from suppliers that can Surprise you
The Supplier Code of Conduct
Entering into a Time and Materials Contract
Supplier's bid Comparison Formula
Supplier Diversity Program
Determinants of a Modern Purchasing Department
Negotiating With Suppliers Over their Policies
Procurement Project Management Plan
The Purchasing Risk Analysis
Inventory Audit Checklist
Hazards Of Purchasing profession
Tactical vs Strategic Purchasing
Demystifying Group Purchasing Organizations
Suppliers' Secrets For Negotiating With Purchasing
Cost Savings Reporting: Dot Your I's!
Code of Ethics in Purchasing
Six Sigma to Success