Fixed-Price, or T&M?
Recently I posted about Rewarding Effort vs Results, how different contract structures can have different outcomes. This post covers Time & Materials vs Fixed-Price a little more, looking at pros & cons, and where each one is better suited.
Definitions:
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Time & Materials: Client & supplier agree on the requirements, and an hourly rate. The client is billed based upon the number of hours spent completing the job. Any costs for materials are also passed on. If the job takes 8 hours, the client pays for 8 hours. If it takes 800 hours, the client pays for 800 hours. To prevent bill shock, there will usually be review points to measure progress & time spent. Risk lies with the client.
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Fixed-Price: Client & Supplier agree beforehand on what outcomes the client needs. It is crucial that this is well-documented, so there are no misunderstandings. The supplier will estimate how long the job will take, allow some extra margin, and quote a figure. The client pays the same amount, regardless of how long the job takes. Risk lies with the supplier.
Comparison:
| Time & Materials | Fixed-Price | |
|---|---|---|
| Pros: | Little time/energy wasted on quoting - engineers can get to work faster. Customer saves money if job takes less time than expected. Easy to modify requirements during delivery. Engineers encouraged to do a good job, not just get it signed off so they can move on. | Client knows up front what they’re getting, and exactly how much it will cost. Supplier is encouraged to get job done as quickly as possible. |
| Cons: | Costs can blow out - customer is assuming risk. Unscrupulous suppliers may use more time than is strictly necessary. | Cons: May take a lot of time and energy to define requirements. This is not directly chargeable, but those costs need to be recovered somewhere. Supplier is assuming risk, and so needs to factor in contingency (typically 10-20%). Engineers are under pressure to get project signed off - that doesn’t always mean things are properly ‘done.’ |
| Best suited for: | Complex jobs, where the requirements may not be fully understood, or challenges may emerge during implementation. Works well where there is a high degree of trust between customer and supplier. Can also work well for small jobs, where preference is to get under way quickly. | Best suited for: **Well-defined, repeatable pieces of work - e.g. oil and filter change for typical car. |
No one model is ‘best’ - either one can work, depending on the nature of the job, and the relationship between client & supplier.