Time and Materials Billing Guide for Construction Projects

In Saudi Arabia’s booming construction industry, especially with the ongoing mega-projects under Vision 2030, the Time and Materials (T&M) billing model is becoming a key strategy for contractors and clients alike. This billing method ensures flexibility in managing project costs, especially when the scope of work is uncertain or constantly growing, as is the case with many large-scale projects in the Kingdom. 

The country is set to spend an estimated SR 1.3 trillion on construction by 2030, with significant projects like NEOM and the Red Sea Project driving growth. T&M contracts are gaining popularity in this dynamic environment, as they allow contractors to be paid for the actual hours worked and materials used, while offering transparency and flexibility to clients. 

In this article, we will explore the intricacies of Time and Material billing, how it works within Saudi Arabia’s regulatory framework, and the best practices to ensure smooth implementation.

At a Glance

• Time and Materials billing provides flexibility for dynamic construction projects, making them ideal for large-scale developments under Saudi Arabia’s Vision 2030.
• Contractors are paid for actual labor hours and material costs, with a markup for overheads, ensuring transparency and fairness for both parties.
• Real-time tracking of labor and material usage ensures accurate billing, reduces errors, and prevents discrepancies in T&M contracts.
• T&M contracts can lead to unexpected costs if not managed carefully, but including not-to-exceed clauses helps control expenses.
• Clear contract terms, accurate record-keeping, and regular client communication are essential for managing T&M billing efficiently in Saudi Arabia.

Understanding Time and Materials Billing 

Time and Materials (T&M) billing is a model where a contractor is reimbursed for actual labor hours and material costs, plus a pre-agreed markup for overheads and profit. This model is particularly beneficial for construction projects that are dynamic and subject to frequent changes, such as those in Saudi Arabia’s rapidly growing infrastructure sector.

For projects under Vision 2030, such as the development of NEOM and major tourism projects, T&M offers the necessary flexibility to adjust to growing requirements and timelines. Additionally, it ensures that contractors are paid for their actual work and expenses, providing a fair billing system for both parties.

T&M billing is particularly beneficial in situations where the scope of work is difficult to estimate upfront, such as design-build projects or when unexpected challenges arise. In these cases, T&M contracts offer a more suitable structure than traditional fixed-price contracts.

Key Components of a T&M Contract

A T&M contract in Saudi Arabia consists of several key elements that determine how labor, materials, and markups are calculated and billed. 

Let’s look at each component in detail:

1. Labor Costs in Saudi Arabia

• Labor costs are typically charged at hourly or daily rates, which can vary based on the skills and experience of the workers. In Saudi Arabia, contractors should differentiate between local labor and expatriate workers. Local labor costs are often lower than those of expatriate labor, and this distinction must be reflected in the contract.
• Contractors must also adhere to the Wage Protection System (WPS), which mandates that workers' wages are paid via bank transfers to ensure transparency and fair compensation. This also affects how labor costs are documented and billed in T&M contracts.
  

2. Material Costs

• Material costs in T&M contracts can be more challenging to estimate, particularly when sourcing materials locally versus importing them. Imported materials often incur additional shipping, handling, and customs duties, which should be included in the T&M billing.
• Contractors should be aware of Saudi Standards, Metrology, and Quality Organization (SASO) regulations for materials used in construction, ensuring compliance with local standards while calculating material costs.

3. Markup Structures

• T&M contracts include a markup on labor and materials to cover the contractor’s overhead and profit. The markup percentage can vary depending on the project’s size, complexity, and the contractor’s operational costs.
• In large projects, contractors may include tiered markups based on different project phases or material types, ensuring that clients are informed of any adjustments to costs as the project progresses.

4. Not-to-Exceed Clauses

• To protect clients from cost overruns, it is common to include a not-to-exceed clause in T&M contracts. This clause sets a maximum amount that a client will pay for the entire project, ensuring that both parties are aware of the upper limits on cost, even in an open-ended billing model.

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Also Read: Construction Management Planning: A Complete Guide

Struggling with T&M billing complexity? See how HAL automates it for Saudi contractors.

Billing and Documentation Practices

Proper billing and documentation are essential to ensure transparency and avoid disputes. 

Here are some key practices for managing T&M billing:

• Invoice Requirements
  
  • T&M invoices should include a detailed breakdown of the labor hours worked, materials used, and any markups. Contractors should provide supporting documents, such as timesheets, receipts, and purchase orders, to justify the costs.
  • To maintain transparency, contractors can use digital tools for real-time tracking of hours worked and materials consumed, ensuring accuracy in invoicing and reducing administrative errors.

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• Billing Frequency and Progress Billings
  
  • Billing frequency can vary depending on the project’s scale. Contractors can choose to bill on a weekly or bi-weekly basis, or based on project milestones. Regular progress billings allow both parties to manage cash flow effectively.
  • Progress billings allow the contractor to request payment for completed work, which is essential for maintaining liquidity in large-scale projects.

Advantages and Disadvantages of T&M Billing 

Time and Material (T&M) billing allows flexibility and ensures clients pay for actual work done, promoting transparency. However, it can lead to budget overruns and requires careful management to prevent excessive costs, making it essential to monitor project progress closely.

Let’s look at them closely.

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Advantages:

• Flexibility for Growing Projects: T&M contracts allow for adjustments to the scope and timeline as the project progresses, making them ideal for the unpredictable nature of large infrastructure projects.
• Transparency and Fairness: T&M billing ensures that clients are only charged for the actual work performed and materials used, promoting fairness.
• Ensures Contractors Are Paid for Actual Work: Contractors are compensated for the time and materials they actually use, making this model particularly beneficial for projects with fluctuating requirements.
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Disadvantages:

• Risk of Cost Overruns: If not carefully managed, T&M contracts can lead to cost overruns, particularly if the scope of work expands or if material prices increase unexpectedly.
• Potential Client Concerns: Clients may be wary of open-ended costs and prefer fixed-price contracts. This can be mitigated by including a not-to-exceed clause.
• High Administrative Costs: Maintaining accurate records of labor hours, material receipts, and overheads requires significant administrative effort.
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Also Read: Cost Planning in Construction: Explore Key Benefits & Types

Best Practices for Managing T&M Billing

To ensure smooth T&M billing in construction projects, contractors should follow these best practices:

• Clear Contract Terms: Define labor rates, material costs, and markups in the contract. This transparency helps prevent confusion and ensures both parties are on the same page.
• Regular Communication: Maintaining open lines of communication with the client throughout the project helps address any issues promptly and avoids misunderstandings about costs.
• Accurate Record-Keeping: Contractors should use digital tools to track labor hours and material usage in real-time. This ensures that the invoicing process is smooth and accurate.
• Educating Clients: Clients should be educated on how T&M billing works, including how labor and material costs are tracked and billed. This helps set expectations and reduces potential concerns.

Local Considerations and Regulatory Compliance in Saudi Arabia

Contractors working in Saudi Arabia must comply with the country’s specific construction regulations and financial practices:

• Saudi Contractors Authority (SCA) Guidelines: Contractors must adhere to the SCA’s standards and ensure that their T&M contracts align with local laws and regulations.
• Vision 2030 Projects: Saudi Arabia’s Vision 2030 mega-projects often require the flexibility of T&M contracts due to their scale and complexity. Understanding how T&M fits into these projects is essential for contractors.

• NEOM: A $500 billion megacity project in Tabuk Province, NEOM encompasses various developments such as The Line, Trojena, and Oxagon. The dynamic nature of these projects necessitates adaptive billing methods like T&M to manage fluctuating costs effectively.
• Red Sea Project: Spanning 28,000 square kilometers along the Red Sea coast, this regenerative tourism initiative is set to feature luxury resorts, marinas, and recreational facilities. The project's scale and complexity make T&M billing suitable for tracking labor and material costs across its multiple phases.
• Qiddiya: Located southwest of Riyadh, Qiddiya is a 360-square-kilometer entertainment city under development. With its diverse attractions and infrastructure, T&M billing allows for precise cost allocation and adjustments as the project progresses.
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Implementing T&M billing in these projects ensures transparency, facilitates compliance with local regulations, and aligns with the dynamic nature of large-scale developments under Vision 2030.

Ensure SCA compliance with HAL's Saudi-specific features. Schedule a consultation today!

How HAL Can Streamline T&M Billing for Construction Projects?

HAL simplifies Time and Materials (T&M) billing with AI-powered tools that ensure accuracy, efficiency, and real-time tracking, helping contractors manage costs and optimize project performance.

• Real-Time Tracking: HAL tracks labor hours and materials in real-time, providing accurate billing and avoiding discrepancies.
• AI-Powered Cost Forecasting: HAL predicts costs and adjusts resources based on project progress, minimizing surprises and staying within budget.
• Smooth Integration: HAL integrates with local financial systems, making payment processing and compliance effortless for contractors in Saudi Arabia.
• Efficient Invoicing: Automated invoicing reduces administrative burden, speeding up payments and improving cash flow management.
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For instance, Jash Holding, a major player in facilities management, faced operational inefficiencies such as scattered project data, manual payroll errors, and poor inventory control. By implementing HAL Contracting, they centralized financial workflows, automated payroll, and improved asset management. This led to a 60% increase in operational efficiency, demonstrating the effectiveness of integrated solutions like HAL in resolving procurement challenges.

Trusted by 200+ Saudi Construction & Contracting Companies. Join leading firms across the Kingdom using HAL to simplify time and material billing with AI precision and compliance confidence.

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FAQs

1. What is Time and Materials billing in construction?

Time and Materials billing is a contract model where contractors are paid for actual labor hours and material costs, with an additional markup for overhead and profit. It is ideal for projects with growing scopes.

2. How are labor costs determined in a T&M contract?

Labor costs are calculated based on hourly or daily rates, which may vary depending on worker skill levels and experience. Local and expatriate labor rates often differ, so this distinction should be made clear in the contract.

3. What is the typical markup percentage for T&M contracts in Saudi Arabia?‍

The typical markup percentage for Time & Materials (T&M) contracts in Saudi Arabia ranges between 15% to 30%, depending on the complexity of the project, industry, and specific client requirements.

4. How does Saudization affect T&M billing rates?‍

Saudization, or the Saudi nationalization policy, can impact T&M billing rates as companies may need to hire more Saudi nationals. This could increase labor costs, potentially leading to higher rates for T&M contracts to cover the added expenses.

5. What are ZATCA requirements for T&M invoicing?‍

ZATCA requires that all T&M invoices in Saudi Arabia include clear details of the services provided, their respective costs, and VAT calculations. Invoices must be submitted electronically through the ZATCA-compliant system for compliance with e-invoicing regulations.