Time-and-Material Pricing: Formula & Example Video

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• 0:48 Determining the Cost
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Lesson Transcript
Instructor: Kevin Newton

Kevin has edited encyclopedias, taught middle and high school history, and has a master's degree in Islamic law.

A number of companies use time-and-material pricing as a method to make sure that they make a profit. However, as this lesson will demonstrate, it is not always as straightforward as it seems.

What Is Time-and-Material Pricing?

Pretty much everyone has been there: Your car breaks down, and you take it to the mechanic. Once you get there, you receive a quote for the price of fixing your car. Broken down into two parts, it shows the price of the materials necessary to fix the car, as well as the time cost as labor. While your mechanic may be breaking down the cost for you, what he is really doing is called time-and-material pricing. In this style of pricing, customers are charged an hourly rate for time as well as the cost of any materials. As you might imagine, this is not without its problems. In this lesson, we'll look at how prices are set according to the time-and-material pricing method, as well as a number of disadvantages the industries which use this style face.

Determining the Cost

To find the cost that a company will pay for using a supplier that operates off a time-and-material pricing system, simply add the cost of the time used to the cost of any materials that have to be purchased. For example, if you are using a lawyer who charges \$300 an hour, you would not only pay \$300 for every hour that she works on your case but also any filing fees that come as a result of her work. In other words, let's say that you needed a lawyer to review a contract for you. The lawyer tells you that it will be 10 hours of work plus any costs. That means \$3,000 dollars, as well as the cost of the lawyer to contact all parties in the contract to discuss it with them and any other costs associated with reviewing the document. For this instance, that comes out to \$100 dollars for paper, phone service, and gas to drive to meetings. As such, your final cost would be \$3,100.

As you can imagine, this almost guarantees the supplier a profit; in fact, some firms even charge for printing! However, the company has to have two pieces of information before it can use a time-and-material plan. First, it has to know how much money it needs to make over the year. This is not only including profits, but also money to cover any costs. Second, it needs to have an accurate idea of how many hours it can bill for each year. To find the time cost, divide the total amount of money needed by the number of hours that can be worked.

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