Labor and materials

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Labor and materials is a standard phrase in a contract for construction in which the buyer agrees to pay the contractor based upon the work performed by the contractor's employees and subcontractors, and for materials used in the construction (plus the contractor's mark up), no matter how much work is required to complete construction. This is opposed to a fixed-price contract, in which the buyer agrees to pay the contractor a lump sum for construction no matter what the contractors pay their employees, sub-contractors and suppliers.

Labor and materials contracts are not common because of the lack of an upper limit for the price paid by the buyer. However, if there is no time to send the job out for bids and complete construction, a labor and materials arrangement can save time. It is also a common arrangement where the original fixed price contractor abandons the work and another contractor must repair any damage caused by the first contractor and complete the work.

Many labor and materials contracts also carry a guaranteed maximum price, which puts an upper limit on what the contractor may charge, but also allow the buyer to pay a lesser amount if the job is completed more quickly.