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T&M With Not To Exceed Condition

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Curious on your opinions on setting a “not to exceed X$” on a time and materials contract.

My experience with the not to exceed amount has been limited to more well defined jobs like a ballast bypass LED retrofit for example. Something where I’m fairly certain I won’t lose money.

I have a “can of worms” type of job in an industrial setting coming up and they would like me to add a not to exceed amount. The level of risk seems high because of the amount of unknowns, hence the T&M to begin with.

Anyone have a good compromise for situations like this, some sort of escalation clause or anything I could add so I make sure I don’t lose my ass? Just put my foot down and say no way in hell?

Any input is appreciated.
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when bidding , i always assume Worst case scenario. then if it happens i am covered, it not then more profit
possibly that approach plus maybe 20% would give you a possible NTE that both parties can live with

on the other hand, if they want an NTE
it amounts to asking for a bid, but they wont pay for any thing you dont actually spend

i would drop the T&M with a NTE and make an outright bid i know i can live with
then i get all the profit
or loss , but that is the point of proper bidding
look carefully and dont git bit

if they dont like this ... too bad ... next job please
 

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Master Electrician - Ontario
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I have used NTE clauses previously. My experience is that is simply a "checkpoint" for budget along the job. If you are communicating to the client as you go along that the deliverables cannot be achieved with the current NTE, then the client can make business decisions on the situation. As an example, it might be more cost effective to totally replace a piece of equipment then spend money on continual repairs to get it to run right, but there needs to be that initial diagnostic completed first.

If you say in your proposal that you are going to fix the machine to 100% and have an NTE clause, then you have provided a "quote" and you need to honour it.

Cheers
John
 

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Usually in that situation I try to skip the t&m entirely and hard bid the NTE amount, and float the possibility of a credit afterwards. Always seemed to me like t&m with a nte just puts all the risk on me with no reward. All you can do is hike your hourly to compensate for risk, but customers usually hate that, and it makes it more likely they'll birddog your hours. I've also just quoted cost of full replacement as an nte, or you could not commit to any deliverables and credit back profit if it isn't diagnosed by the time you hit the nte. Kinda depends on the project and customer, but that's my two cents.
 

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Hackenschmidt
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I used to do this, it seemed reasonable on the customer's part, they just want to know what the worst case scenario is. But think about what they are saying. If it goes easy, they get a real low price. If itgoes hard, YOU take it in the shorts. They are asking you to assume all the risk if this goes down a rabbit hole - you keep working for free until it's finished if it turns out to be a nightmare! It's win win for the customer, but not for you.

There are a lot of fair square ways to structure the cost but you taking the all the risk and them getting all the reward is not one of them.
 

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I bid all of my work. Hard number up front. If I consider T&M there is something I do not like. Squirrely customer, wishy washy, target moving and of course, you want it when? The worse the customer is supplying the materials. I did a remodel of an old hotel that was T&M with a ceiling of a million dollars. I got up on the 5th floor and dropped a plumb bob down the old elevator shaft that every one was using for a utility chase. The plumber and I both said at the same time Holy _hit!
The chase was 5 inches out of plumb in 3 floors in two directions. It was a wonder the elevators even when up and down. The bus duct was going to need some tweaking.
The owners of the place were furious when we started reordering equipment. We had a semi full of walker duct. The walls were about 1 foot of reinforced concrete. Hide the electrical HA. Walker duct for the fire alarm.
They had to furr down the ceilings in the hall ways to fit the electrical and plumbing. Then came the coup de grâce, the city shot down all of the 277 v air conditioners for the rooms. Almost shut the job down. Some one in the owners circle had some deal worked out for the 300+ ac units and had bought them at 277v. I tried to look sad and concerned while I was laughing my ass off. The whole job was one cluster after another. We went through 5 project manager companies in less than a year.
I started singing the Def Leppard song FOOLIN (
) My crew went to work at 4:30 am, summer hours and you could still have a radio on the job site.

I was extremely lucky I had people that I could trust and had my best interest in mind when I asked for their opinions. Other wise I would have been like several other contractors that were forced out of business. I was counseled not to vary from T&M.
 

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Electron Factory.Worker
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Depends on the relationship with the customer. We almost exclusively have T&M NTE contracts with customers. Its not really a not to exceed, it's just a ploy to keep the bean counters happy. They won't allow a blank check PO so it puts some $ value on it. If it goes over they just write a Change order to cover the extras. We've never actually been held to a NTE. In theory its a lose lose situation the customer gets the best of both worlds. We also work with these customers all the time so we have a long standing relationship.
 

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Make sure you list what is covered in the NTE, then charge large. If it is not in the scope of the NTE then it is a change order.
Example: Trace circuits and install markers, run new circuits and conduit for XXX part of the project.
Exclusions: Replacement of any panels found in unusable condition, Any code violations that may be uncovered in process of project.

Start thinking on them terms of spell it all out what is and what is not to be included.

Cowboy
 

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What is both parties’ expectation of what happens if you reach the NTE limit & job is only say, 75% complete. Do you walk away, finish without more doors or what?

As a system integrator we did this a lot and nobody was ever happy.

Make sure to carefully document any scope changes or unexpected discoveries.
 

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Discussion Starter · #12 ·
Thanks guys, great advice from each of you

Like many aspects of the trade it seems like it comes down to managing the expectations of the customer and establishing good communication.

I have a follow up next week before submitting my formal proposal, so I appreciate the pep talk and words of wisdom from all of you.

Much love from the mountains of Colorado.
 

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Chief Flunky
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Curious on your opinions on setting a “not to exceed X$” on a time and materials contract.

My experience with the not to exceed amount has been limited to more well defined jobs like a ballast bypass LED retrofit for example. Something where I’m fairly certain I won’t lose money.

I have a “can of worms” type of job in an industrial setting coming up and they would like me to add a not to exceed amount. The level of risk seems high because of the amount of unknowns, hence the T&M to begin with.

Anyone have a good compromise for situations like this, some sort of escalation clause or anything I could add so I make sure I don’t lose my ass? Just put my foot down and say no way in hell?

Any input is appreciated.
T&M means zero risk to you, no matter what form it’s in. ALL risk contingency is on the customer.

If you have a not to exceed clause that just means there is a billing cap. There is NO performance cap. It’s basically like giving the customer a budgetary only quote…there is no contractual obligation except that you stop work when the money is spent. So it’s actually even more of a risk to the customer.

As far as why do it…because accountants and purchasing people absolutely can’t understand contract law and why a T&M might be the right thing. They think every contract should have a stated amount. They are very small minded.

Either one encourages unscrupulous contractors to milk the job.

There are more advanced risk/cost sharing systems than the two extremes (fixed bid or T&M) but you usually don’t see those on less than million dollar jobs.
 

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I handed out a emergency work po resently

That had a yearly 100k t&m "not to exceed limit."

Contractor might do 10k worth of work during the year but then again it might be a lot more. If we hit the 100k limit he has to stop work until finance renews the contract.
 

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If you have a not to exceed clause then I would have them sign every thing they ask for as an extra. Let them know that the do not exceed does not include them adding whatever they want
Yes....You need a very detailed scope of work listing everything your NTE includes/excludes. NTE does not mean there are no change orders.
Also, every bender, ladder, puller. threader, manlift, etc....gets charged to the job at a rental rate
 

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I handed out a emergency work po resently

That had a yearly 100k t&m "not to exceed limit."

Contractor might do 10k worth of work during the year but then again it might be a lot more. If we hit the 100k limit he has to stop work until finance renews the contract.
I think that is different than the expectations of most T&M not to exceed customers. I would not do those because of the reasons stated above, if I perform better than expected then the customer gets all the benefit. If the job goes poorly, I get burden. Not for me.

T&M is T&M. A price is a price.
 
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I think that is different than the expectations of most T&M not to exceed customers. I would not do those because of the reasons stated above, if I perform better than expected then the customer gets all the benefit. If the job goes poorly, I get burden. Not for me.

T&M is T&M. A price is a price.

Time being at a pre-agreed price per hour and material having a set mark up means its still T&M.

As i do not know what the emergency will be its simply saying the electrical contractor can take on a job/job's up to 100k over the year with out requiring pre-approval or quotes. Its basically a open PO for 100k. (scada has a 300k emergency contract). Managers like to abuse the system which keeps the contractors happy doing minor work for top pay.

Accounts are happy as they know they will never find a huge payment due that was not pre-approved and 100k is basically seen as a known running cost for emergency's and staff coverage.
 

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T&M means zero risk to you, no matter what form it’s in. ALL risk contingency is on the customer.

If you have a not to exceed clause that just means there is a billing cap. There is NO performance cap. It’s basically like giving the customer a budgetary only quote…there is no contractual obligation except that you stop work when the money is spent. So it’s actually even more of a risk to the customer………
Unfortunately some of our customers didn’t see it that way. I guess it depends on your perspective, ha, ha!!
It needs to be defined clearly up front.
 

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Chief Flunky
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Unfortunately some of our customers didn’t see it that way. I guess it depends on your perspective, ha, ha!!
It needs to be defined clearly up front.
From a customer perspective T&M is dangerous. You assume all risk on cost overruns. The contractor has every incentive to milk the job. All scope creep is in you. And as I stated not to exceed just means you have to set up another requisition to clean up abc actually finish later.

There are legitimate reasons for T&M. “Open” contracts is one. Jobs where nobody knows how much it’s going to cost. Emergencies. Temporary employees or “embedded” contractors. I’ve seen lots of businesses where a company comes in and basically runs the maintenance or runs an entire plant. They just submit every bill and collect a management fee.

You can actually save money on T&M. Two obvious uses. One is when you do large jobs involving multiple contractors where risk pooling saves money. So in this situation you first get estimates then ask for T&Ms from everyone then run your own supervision team to drive the project The idea is that normally everyone has 15-20% contingency built into the fixed bid. But the chance of ALL contractors having their jobs go South is very unlikely. So you run a single PROJECT contingency of say 10%. It works but trust me the construction management team is a lot of work. I’ve been involved once. The project was for $50 MM. Due to unforeseen costs in basically getting things done in a foreign country plus a lot of equipment damage (millions in gearing) we had to go back to ask for another $15 MM. At that point corporate accounting got involved so we had to do creative financing but the project went ahead as expected. By the way, the electrical portion did go up because of inflation on copper prices but we were within the original contingency estimate (on budget).

The second way you save money is the GC method…do it on T&M then ride the contractors rear end at every step along the way. You will burn your relationship long term but it saves money.

As to the comment about not making money on T&M, you are doing it wrong First you do an estimate. You do NOT supply materials at cost. Typically it costs 7% on average for sales tax (depends on the state) and 3% for shipping. By the time you figure in time for someone to order, track, receive, etc., figure 15% materials markup. Similarly labor has huge overhead. At a bare minimum might as well double the hourly rate you are paying. Then on top of that you have to estimate the risk of things not going well and add this on. Supposedly if you plan a job well it’s 10%. But nobody pays for detailed planning and engineering ahead of time so 15-25% is more realistic. THEN figure your profit on top of that. Realistically if done properly you should over/under run your contingency 50% of the time. So you lose your ash 50% of the time.

In a way contingency is an insurance policy. You should spend contingency when jobs go well covering the ones that don’t. Profits come over and above all of this

On a T&M job contingency is zero. That does not mean markup is zero…you still have profits. You shouldn’t be treating contingency as profits. T&M jobs are great because profits (as a percentage) are guaranteed. The big downside is the amount you make on the job isn’t locked in so it makes planning harder.

On maintenance contracts often the profits are lower but consistent where fixed bid jobs are more profitable but you get all the risk.
 

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In a large company they like you to balance year end accounts. There are lots of pots of money assigned to different things and if you come in over or under you have to go see the accounts department and explain why.

Last month of the year the contractor that was awarded the emergency T&M contract is going to be doing some minor work for the same rate they would get as a emergency call in the middle of the night. If there is a serious amount in the pot they are also buying some electrical tools adding mark up and just leaving them on-site after the job is done. (I have a lot of nice tools)
 
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