Definition
Lump sum (fixed price) is a single agreed price for defined scope; the contractor bears cost risk and keeps any savings. Time and materials (T&M) is billing at agreed rates for labor and materials (plus markup) as incurred; the owner bears cost risk. Hybrids exist (e.g., T&M with a not-to-exceed cap).
Why It Matters
Choice affects risk and cash flow. Lump sum requires accurate estimating and scope control; T&M shifts risk to the owner but can lead to disputes if scope creeps. Contractors must track cost and time on both—on T&M to bill correctly, on lump sum to protect margin.
Field Example
Lump sum: “Kitchen remodel, $45,000.” Owner pays $45,000 regardless of whether the job costs $38,000 or $48,000. T&M: “Labor at $65/hr, materials at cost + 15%.” Owner pays for actual hours and materials; if the job runs long, the owner pays more.
Calculation / Formula (if applicable)
Lump sum: One total price; progress may be billed by percentage or milestones. T&M: Invoice = (Hours × Labor rate) + (Materials × (1 + Markup)) + (Subs + other) per contract terms.
Software Application
Support both contract types. For lump sum, track estimate vs. actual cost and support progress billing (e.g., % complete or schedule of values). For T&M, track hours and materials by job and apply contract rates and markups to generate invoices. Report profitability and variance for each.
Tooltip Version
Lump sum is a fixed price for the job; T&M bills actual labor and materials at agreed rates. Each has different risk and billing rules.
Related Objects
Related: