Time & Material Bid

[bwat]

How often do you guys get requests for formal competitive bid where the customer wants it to be T&M not-to-exceed?

Gets under my skin a little. Either make it a competitive bid and firm fixed or make it T&M. If my company is taking on risk by making a bid lower in order to win it, we should be the ones to benefit if we’re able pull it off for less. Risk = compensation.

Very rarely does this competitive T&M NTE bid type ever happen, but it’s happened a couple times semi-recently. We do a lot of firm fixed and also T&M. No problem with either. Usually the T&Ms are not to exceed anyway, but they usually aren’t in a bid process where we could have lost it by someone beating us by 5-10K. We’re on the engineering design-build side. We do all sizes but let’s say this is around $100k bids. Interested to hear how much others come across this in all electrical fields. Maybe everybody deals with this a lot more and I’ve just been fortunate to be spared from it.

 

[don_resqcapt19]

I will bid a job as a hard money bid or give an estimate for a T&M project, but will not give a T&M not to exceed price. You have it exactly correct the risk = compensation, and you don't have than in a T&M not to exceed.

 

[LarryFine]

I would not guarantee a maximum without a guaranteed minimum.

 

[cdslotz]

Not To Exceed does not mean there are no change orders

 

[paulengr]

There is no risk in a T&M. The customer accepts all risk including performance. If you hit the not to exceed value that’s it.

Realistically in a T&M you are bidding three things. Your reputation, your hourly rate, and your materials markup. No risk contingency at all.

There are three reasons to use T&M. The first is when the job scope is so poorly defined that your risk contingency explodes. For instance troubleshooting...you can’t possibly know how much time or materials are involved. This is typically T&M work.

Second is when simply loaning our employees or selling materials. You are basically a recruiter or a distributor. You are charging your markup and that’s it. Only risk
Is nonpayment and/or law suits.

Third is when it’s a legitimate bid but someone else is eating risk contingency. So say I’m doing a $50 million project. I get buds from my contractors who all put risk contingency on their bids. Then I add them up and add additional project risk contingency (10-20%). The thing is I’m double dipping...contingency on contingency. So if the project budget is tight some project managers want T&M bids do they manage risk all in one big pot of money, which can trim 10% off a project.

The downside from a project management point of view is there is no incentive for the contractor to control costs. Contractors profit is locked in. If the T&M budget blows up its not the contractors issue. On fixed bid normally the contingency budget IS the profit on the job. Contractor eats every hiccup that isn’t unforeseen. So they do anything to keep costs down and get done as fast as possible.

On a particular large project one contractor did a cost sharing scheme. They had prenegotiated change order rates bid at a cost plus rate, and a bonus for early completion so instead of giving away profit as in a pure T&M not to exceed they received a bonus for early completion or going under budget on materials where they split the money 50/50 with the customer. These schemes attempt to maintain the incentive of fixed bid while still moving most of the risk contingency into the project budget.

 

[bwat]

Thank you all for the responses. It sounds like this isn't very common in general, which is a good thing. I didn't know if I was being unreasonable about it.

Not To Exceed does not mean there are no change orders

Yes, but a change order can't have the reason of "I estimated low" if I was bidding against others to win it.

There is no risk in a T&M. The customer accepts all risk including performance. If you hit the not to exceed value that’s it.

This is the way it SHOULD be, and is more like the standard T&M that we do every day, but not in the situation I'm describing where there is a competitive bid but the billing terms are T&M NTE. If you hit your budget but didn't complete the bid-upon spec, you're expected to remedy it without additional funds. Unless there were changes of course. And exaggerated change orders never make a client feel good about working with your company.



@paulengr I appreciate the rest of your post and the cost/profit sharing is a good middle ground. I'm all about being reasonable. I may keep that one in mind just in general. Even if it's not a bid job that might make everyone happy.

 

[acin]

I have worked for some people for years they tell me what they want i do it and send a bill. Its all about trust

 

[bwat]

I have worked for some people for years they tell me what they want i do it and send a bill. Its all about trust

Yes, we do that all the time as well. That's the typical T&M model, and is great, but not what I was describing here with a bid process.

It's higher than years past, but I would actually say the last 2 years at least 90% of my work has been T&M in the same way you describe with key repeat clients. No problems there.

 

[oldsparky52]

T&M not to exceed is an oxymoron.

 

[bwat]

T&M not to exceed is an oxymoron.

Haha in a way I agree. Around here, T&M NTE typically means T&M with a nice contingency on it to make sure you'll get the whole job done and the final billed number is lower than (or equal to) your proposal. It's a ceiling. In other words you have to make a really good case for a supplement/change order to go over that number that conditions called out before contract award were different than actual.

We see T&M NTE when the spec isn't all that clear, the client wants to come only to you on a T&M basis (no bid), but wants a maximum. Usually we make all kind of assumptions and clarifications in our proposal for something like this. Usually the job is yours unless you give them a ridiculous number that they don't like and then go elsewhere.

T&M estimate is usually just an estimate. Of course it's good to still come in under this number, but it's usually a best guess with little contingency and usually not bid against others, but can be. Some wiggle room to ask for a supplement if you go over.

This is at least what we see.

 

[marcerrin]

If someone asks you to do T&M with a "not to exceed", they are insulting your intelligence.

 

[paulengr]

If someone asks you to do T&M with a "not to exceed", they are insulting your intelligence.

No there are tons of reasons for doing it.

Say you have a large project with multiple contractors. If you do all fixed bids they all build in risk contingency and then you have some too on the overall project. So if as the project manager (customer) you do TMNTE with performance expectations and then change order everything against a common risk pool you can save money but you have to closely manage the contractors to avoid them milking the job. It’s cheaper but you have less safety net and more management overhead with your own supervisors and inspectors to manage.

Another big reason is that any job that simply cannot be scoped should be pure T&M or a cost sharing structure. This is always the case with troubleshooting and many repairs, and R&D. It is often the case when the customer doesn’t know what they want or you are dealing with someone that constantly changes the job scope. But many corporate purchasing rules (written by clueless purchasing managers) mandate fixed bid on all jobs. So you bid these jobs TMNTE to satisfy the fixed bid requirement. It’s simply T&M with a budget limit without specific performance guarantees.

A related reason is to “save money”. So especially with poorly defined scopes sometimes 25-50% risk contingency is not unreasonable but if blows up the bid. So you can bid specific performance on a TMNTE where you offer to the customer an optimistic budget and agree to charge only what you spend (T&M) with the understanding of what the risk is. As an example if it’s a bid on a multi-year job copper prices in recent years have swung over 300% in a period of months, driving cable and transformer prices that much. You can’t easily plug a 300% hole nor have a competitive bid with that much risk buried in it if most of the materials are cable and transformers.

 

[don_resqcapt19]

No there are tons of reasons for doing it ....

If the T&M not to exceed locks me into completing the project scope on my dime, you can look for another contractor. That is a NO WIN for the contractor....you don't get paid for taking the risk, but you are taking exactly the same risk as a hard money contract, with no potential for an upside for good performance.

 

[paulengr]

If the T&M not to exceed locks me into completing the project scope on my dime, you can look for another contractor. That is a NO WIN for the contractor....you don't get paid for taking the risk, but you are taking exactly the same risk as a hard money contract, with no potential for an upside for good performance.

It is the same “issue” with a T&M contract. You have to realize your profit structure is different. You make money with markup on materials and labor. Your profit is built into every hour of labor. You make money almost no matter what happens.

The only difference is that on pure T&M you have no incentive to do anything performance wise or save on materials. The incentive if you want to call it that is billable hours. The contract structure encourages milking a job.

The only time TMNTE makes any sense at all with performance requirements is with a well defined job scope and a very high budget limit. You have to adhere rigidly to the scope (change order everything). As I said it should only be used in extreme budget issues. Other options would be cost sharing (get a bonus/penalty for meeting an agreed number) or writing up the problematic items as cost plus (bill materials at cost plus 15%). This structure is pretty normal on service and repair jobs. To give you some idea our lowest labor rate is $125/hour for mechanics on straight time and windshield time is at full rates. Top rate is $600/hour. Plus travel expenses when we do overnights. This is in mostly rural areas in the South, not LA or DC.

Our profits are built into material markup and labor. Our core business is all service and repair. We mostly work on T&M type jobs in the first place. Margins are 20-30%. If we are working with TMNTE with a performance requirement we bid the NTE part high or we don’t bid.

There is an alternative but it takes some selling on your part. It’s cost sharing. These are harder to sell except on million dollar job scopes because it’s complicated. In this arrangement we have an agreed target. That’s your “fixed bid”. If you come in under budget you split the difference 50/50 (also negotiable). If it’s over budget, it is split 50/50 (you eat half the overrun). Other percentages are often used. For instance I’m happy if you come under so maybe you keep 75% but you also eat 75% for going over or we split overage at 50/50. Costs are billed based on an agreed labor rate schedule and materials are cost plus. So it’s a blend of T&M and fixed bid. There is still incentive for good performance but it’s not as good as pure fixed bid.

 

[bwat]

The only time TMNTE makes any sense at all with performance requirements is with a well defined job scope and a very high budget limit.

That's pretty much our stance. We do TMNTE quite often, but it ends up being a high number to cover all the uncertainty and make sure there's no chance that we'll take a loss or do any work without getting paid for it. This usually only happens with customers that have been using us exclusively for years and we have large base of repeat customers so this is why we run into it a good bit. Granted, you can't have a windfall because you'll have a fixed profit, but that's the case for all T&M work. I don't particularly like TMNTE or recommend it because of the many reasons already brought up in this thread, but I see it's usefulness at times.

However, if you look at the purposes of why I started this thread, it's with TMNTE when there are multiple people bidding. That's where I have the issue and was looking to see how often the rest of you see this. If a customer just comes straight to us with a request for TMNTE contract.. no problem. If they are putting our TMNTE number up against others, that's when we have an objection.

If the T&M not to exceed locks me into completing the project scope on my dime, you can look for another contractor.

But that's the case for all fixed/hard money contracts.

That is a NO WIN for the contractor....you don't get paid for taking the risk, but you are taking exactly the same risk as a hard money contract, with no potential for an upside for good performance.

Sure there is. If the number and scope is right, there's absolutely the same upside as if it were T&M, and less of a risk than hard money if your number is appropriately higher than would be for fixed price.


Hypothetical example where these are your options. I would say you could make an argument for each one to be the best; depending on scope and specifics.
Regular T&M (strictly estimate): $90,00
Fixed Price: $105,000
T&M NTE: $125,000

The fixed and TMNTE carry the same exact risk in that it's on you to complete it. The upside for the fixed is that you get to keep the profit if you are below the number. The upside of the TMNTE is you get a higher number before you start having to do things on your own dime.