If you’ve ever worked on a construction project, you probably know billing can get tricky. One big question is: How should you charge for the work? Two popular ways are Lump Sum and Time and Materials (T&M) billing. Let’s break down what these mean, and which might work best for your next project.
What’s Lump Sum Billing?
Lump sum billing means you agree on a fixed price for the entire project upfront. Whether the job takes longer or costs more in materials, the price stays the same. This can be great for clients who want to know exactly how much they’ll pay without surprises.
Why lump sum rocks:
- You get a clear budget from the start — no hidden fees.
- Billing is simple; usually just one big invoice or a few milestone payments.
- Contractors have a reason to stay efficient and on schedule.
But watch out:
- If the project hits unexpected snags, contractors might lose money.
- Any changes mean extra paperwork and possibly higher costs.
- Less flexibility if plans evolve mid-project.
What’s Time and Materials (T&M) Billing?
With T&M, you bill based on actual hours worked and materials used. So if you spend more time or need extra supplies, the client pays for it. This method is great when the project scope isn’t crystal clear or could change.
Why T&M works:
- Super flexible — easy to adapt if things change.
- Transparent billing — clients see what they’re paying for.
- Less risk for contractors since they’re paid for actual work done.
Downsides:
- Clients can’t always predict the final cost.
- Tracking time and materials means more paperwork.
- Sometimes clients question the hours or expenses billed.
How Change Orders Tie Into Lump Sum and T&M Billing
Change orders are a big part of construction projects — they happen when the client requests something outside the original plan or when unforeseen issues arise.
- In Lump Sum contracts, change orders mean the original fixed price no longer applies for the new work. Contractors need to submit a formal change order to adjust the price and schedule, which requires client approval before continuing. This keeps the contract fair but can slow things down.
- In T&M contracts, change orders are easier to handle because you’re billing for actual time and materials anyway. Any extra work just gets tracked and billed accordingly. The trade-off? The final cost can go up and become less predictable for the client.
Which One Should You Pick?
Here’s a quick rule of thumb:
- If you know exactly what needs to be done, lump sum can keep things neat and tidy.
- If the project has a lot of unknowns or might change, T&M lets you stay flexible.
- Also, think about your client — some prefer fixed budgets, others like transparency.
Wrapping Up
Neither billing method is perfect, and both have pros and cons. What really matters is clear communication and setting expectations right from the start — especially when it comes to change orders. Having a clear process for how changes are billed helps avoid confusion and keeps projects moving smoothly.
Pick the billing style that fits your project and your client’s needs — and you’ll be on track for a smooth build and smooth payments.