Time and materials pricing is what most contractors call hourly billing: the client pays for your crew's hours and the materials you buy, and the margin is baked into the rate. For small jobs, it usually beats a fixed-price quote on profit.
Clear Results' client Dominic (not his real name) owns a residential renovation and addition company. When Stuart Trier reviewed Dominic's job costs, it turned out the hourly jobs held a steadier margin than the quotes.
On a fixed-price quote, the margin is only as good as the contractor's guess at the hours and costs. With time and materials, the margin rides on the hourly rate and markup, which keeps it steady from one job to the next.
Dominic quoted from memory: $85 an hour, plus 24% on labor, 24% on materials, 24% on subcontractors, and a cushion for setup, errors, and extras. His hourly jobs used the same $85 rate but had a thinner subcontractor markup and no markup on materials. You'd expect them to trail the quotes, and instead they made more profit, which he hadn't seen coming.
"I price our jobs mentally by working it out at an $85 an hour rate, and then I mark that up. It tells me I'm not allotting enough time, if our time and material jobs, with no markup on top of that, are coming in with a better profit than our quoted jobs."
— Dominic
An investing comparison explains it, in Stuart's words. Time and materials is the index fund, and every job earns the same return. Each quote is a stock pick, and most pickers don't beat the index. The quotes that earned the most were those where the estimate was padded above the actual cost, and the quotes that came in below their estimates eroded those gains.
| What differs | Fixed-price quote | Time and materials |
|---|---|---|
| How the price is set | An estimate of hours, materials, and subcontractors, plus markup and padding | Hours worked at an hourly rate, materials as bought, and a markup on subcontractors |
| Where the margin comes from | The difference between the estimate and the real cost | The hourly rate, which already includes it |
| Spread across jobs | Wide: high where the padding exceeded the real cost, low where a step was missed | Tight, because every hour earns the same margin |
| Best fit | Jobs with a design and a plan to quote against | Small jobs, jobs with no design or plan, and job types new to the company |
| Main risk | A miscounted hour or a missed step comes out of the contractor's margin | The client may read slower work as more billing, so updates matter |
Do homeowners care whether they get a quote or an hourly bill? Stuart called that the open question, and if they don't care, time and materials guarantees whatever markup the contractor wants because the contractor knows they'll bill the hours.
A job-cost review is a list of every finished job and its gross profit. Sort it, and the bad quotes end up at the bottom where you can't ignore them, though job costing for contractors only pays off if somebody goes down that list one job at a time. Does the data already exist? For Dominic, it did. His sheet already broke out materials, direct labor, and subcontractor costs as a share of each job's revenue.
For reading the sorted list, Stuart set simple thresholds:
An hourly job of about $122,000 earned 38.75% gross profit, with direct labor at 28% of revenue, and Stuart called it a win.
Dominic's own comfort zone was "30 or 40," which feels great to him. In Stuart's framing, the exercise is a feedback loop: the data lets an owner look back at the quote and the work together and see how the quote was built. He added that the review was meant to educate. Dominic said his estimates were further off than he expected. But gut feel, Stuart answered, is the sum of experience, and each pass through a feedback loop makes it more accurate.
Dominic also found he had done more time-and-material work than he realized. On paper, the list made those jobs look small, and he had not counted how many were billed by the hour. Stuart suggested a rolling average, with the current year's jobs separated from the prior year's, because he expected the data to show that Dominic's quoting was improving. For the full method, see the job costing for contractors playbook and job-level costing.
A time-and-materials rule says which jobs get billed by the hour before anyone starts estimating them. In January, Dominic handed quoting off to a new estimator. Stuart's rule for that person was short: all jobs under $50,000 are time and materials.
Stuart wanted only a few of these jobs. On the ones the company took, the sheet showed a profit without anyone worrying about the quote. Dominic already leaned toward hourly billing: on smaller jobs without a designer or plans, he said, the work gets decided as it goes, and he usually preferred it "because you never know what someone's going to throw at you."
Without a design, nothing exists to quote against. Stuart gave the estimator a plain script for those jobs: when the client doesn't have a designer or a plan, the best way to do the work is $85 an hour, plus whatever else the job requires. When a design exists, a quote works well, because the team can spec to the drawings.
A job type a company has never done has the most risk of a missed step, and hourly billing covers that risk. Dominic's bottom job on the list was his first addition, at roughly 7% to 10% gross profit. The quote left out purging and other work that somebody still had to be paid to do.
"When you're taking on something new that you've never done, time and material will be your insurance."
— Stuart Trier
Dominic could build the addition, and he did. But he lacked the experience to bid it, because he had never been through all the steps. On the next addition, Stuart was less concerned, since the chance of missing those steps a second time is not very high.
Time and materials billing works when the client sees the hours as they build up. Between them, Stuart and Dominic settled on 4 habits:
Stuart didn't sugarcoat the risk. If you bill by the hour, a client can start to suspect that "the slower you go, the more you make" (some will even tell you so outright). The best answer he found is access: hours and receipts the client can open and check.
Take a small roof job that went wrong. It was billed hourly against an estimate of $8,000 to $10,000, and by the end it was heading for $15,000 or $16,000, without the estimator ever checking back with the client. Dominic knocked the bill down to $13,000 (the client accepted), and Stuart agreed the missing updates were the real cause.
Bigger jobs raise the stakes: on one large, unusual project the client had drawn up themselves, Dominic worried the hourly total could end up $100,000 away from what the client had in mind. But Stuart advised him to be upfront from the first meeting: quote from the drawings, explain that every change affects the price, and report the hours used every 2 weeks.
Any trade with hidden conditions can use the same rule. The examples below are illustrations; none come from Dominic's company:
Use these 5 steps on the last 12 months of finished jobs:
To increase profit margin in a home service business, start with step 2. Each low-margin job has a cause, and each cause changes how the next quote is built. For the pricing side of margin, see how to raise prices without losing close rate.
Start with what a worker's hour costs, then add the margin. In Stuart's example, the company bills $85 an hour and pays about $35, leaving $50 of margin per hour (the $35 is an example pay rate). At that margin, a 400-hour job earns $20,000 once the hours are logged. Dominic asked whether to raise his rate to $90. But in Stuart's view, the rate was unlikely to cause the low quotes. Miscounted hours and missed steps were more likely, and those deserved the first look.
Give a ballpark and call it a ballpark. In Stuart's description, the contractor says the client's vision isn't locked, offers a best guess, and plainly states what the company charges per hour. The ballpark reflects the contractor's read of the job, since the client hasn't supplied a design to price against. The project manager then tracks the job and updates the client as it goes.
Show the client what the work costs. One client kept adding scope, so Dominic told him what 3 workers cost for a day, and then he priced each new idea himself. Stuart, who brought up the "slower you go" worry himself, sees it the same way: when a client can see the crew cost, the hours, and the receipts, there's little left to guess.
Treat the request as an ask, and answer it with a dollar amount. In one case, the early estimate was near $100,000 and the final bill near $135,000, since the clients designed the job as it went. With about a month left and costs near $90,000, Dominic updated them, and they still added work. Then they asked for 10% off labor (about $10,000) or 3 workers for a week. Stuart told Dominic he could take the request in stride, since people ask for things. Dominic offered $1,000, and the clients replied within about 3 minutes: send the invoice.
Compare gross profit as a percentage of revenue, and average each group. Dominic's own test was apples-to-apples: a quote built from the hourly rate, 24% markups, and padding, against an hourly job billed at the rate with materials at cost. Stuart noted that jobs where a client pays some bills directly can make the percentages look different, since the contractor never pays those bills.
No. Home service coaching teaches owners a general method. A time-and-materials rule is one decision for one kind of job, and Stuart Trier reached it by going through Dominic's own job-cost sheet line by line in a weekly call. The same session produced the under-$50,000 rule for the estimator Dominic was bringing on in January, along with the 2-week update routine for his clients.
Client details in this article have been changed to protect confidentiality. Any resemblance to a specific business is coincidental.
Stuart Trier is the Founder and CEO of Clear Results. Over the past 20 years, Stuart has built, bought, and sold 11 companies across the home service, healthcare, and marketing industries. He built his first company from startup to $8M in revenue in 3 years before a successful exit, then built a chain of 28 healthcare clinics and sold the business to a publicly traded company. Following that acquisition, Stuart spent 3 years working alongside the CEO, helping lead the organization through a take-private transaction before participating in a nine-figure exit to a Fortune 10 company. Today, he's the lead investor behind an electrical services platform operating across 3 U.S. states, and has worked directly with owners through 1,800+ strategic advisory sessions.
