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Choosing between Fixed Price and Time & Materials

Introduction

When commissioning a third party to perform some bespoke development or design work, they will typically quote on the basis of a fixed price, or 'time and materials'. Choosing between the two can have some implications; as can discarding one in favour of the other.

There may be some cost planning benefits attached to a fixed price project, while a time and materials approach can improve flexibility. However, the inverse is also true; a time and materials project might spiral out of control, while a fixed price project may be delivered incomplete.

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Fixed Price

A fixed price contract is established on the basis of a single price, single service understanding. In other words, the contractor should undertake to deliver, for the price in the contract, the service that is set out by the client; respecting the timeframe and deliverables agreed upon.

There are, however, a few points worth noting. Firstly, the cheapest offer is not always the best option. This is especially true if there are no penalties for late delivery or missed milestones. Without such penalties, the contractor may fulfil the project in 'downtime' : time that is not assigned to any other project, resulting in late delivery and poor quality work.

The materials used will also contribute to the price and quality of the end result. Taking both into consideration and balancing the quality against the cost is necessary if each offer is to be placed on the same footing.

Often this will need a third party expert to review the offers; since the quotes will be for work likely to fall outside the competencies of the client. Even where the client understands the problem area, legal or professional advice can prove invaluable.

Time & Materials

By contrast, a time and materials project quote is established on a per unit basis; the client pays for x person days, and y units of materials, once the project is deemed complete. The flexibility comes in being able to decide when the project is complete, the risk is that the costs can quickly mount up.

Since the essence of the project cost will be in the time that is spent, the client needs to be sure that the definition of time is agreed upon. It should not, for example, include resource management tasks that are not related to the project in question.

Thus, reporting of time, and time management will play a large part in the quote and follow up of the project plan. It is usually good practice to indicate what portion of the time paid for is allocated to project management, just so that no resources are wasted.

The definition of materials is also slightly more difficult to quantify in IT terms. One might assume that if the work takes place away from the premises of the client, that the client might be expected to recompense the contractor for heat, light, and electricity costs. Again, this should be stated in the contract; and if the contractor does not require such compensation, then that should be stated too.

It is worth remembering that projects are often late and over budget in IT. This is not, however, an acceptable situation, and should not be accepted as an excuse for a project not to be completed. In signing a T&M contract, though, the client does accept a slightly increased risk that the cost of the project might eclipse the budget set aside for it.

Summary

In the final analysis, any choice boils down to trust, risk, price and quality; and this true for both fixed price and time and materials projects. Some projects lend themselves to a time and materials approach, especially when the scope is flexible, and others to a fixed price contract.

The skill is in choosing the right kind of contract, obtaining the best value for money, and then managing the project to completion. Often engaging a temporary third party to take on this role can bring substantial benefits, especially when done within a co-sourcing framework.