Labor and materials (time and materials) refers to a type of contract under which a customer agrees to pay a contractor for the actual cost of labor and materials used to complete a project, plus an agreed-upon markup or fee. Instead of setting a total price in advance, the contract compensates the contractor based on the time spent and the materials supplied.
This arrangement differs from a fixed-price contract, in which the parties agree to a lump-sum amount for the entire project before work begins. Time and materials contracts are commonly used when the scope, duration, or cost of the work cannot be accurately determined at the time of contracting, making it difficult to negotiate a fixed total price.
[Last reviewed in March of 2026 by the Wex Definitions Team]