Time and Materials Contracts: A Value Proposition
It’s no surprise to anyone that software project managers dislike firm fixed price contracts. As many others have noted, firm fixed price contracts are typically accompanied by an expectation of fixed scope by the customer as well. In a world where estimates are notoriously uncertain to begin with, if there is no room to move on scope, the software team is “boxed in”, producing code that tends to veer dangerously away from the best value and quality.
In other words, instead of focusing on the work that produces the greatest return on investment for the customer, the team ends up focusing their efforts on functionality that either:
- Rigidly conforms with requirements that
should have been de-prioritized in importance in favor of other new, emerging requirements now that the business domain and solution space are more clear, or
- Producing large amounts of paperwork or process so that changes in scope are cleared against a fixed budget constraint.
Given this, it’s pretty clear that firm-fixed price contracts end up deforming the whole purpose of convening a group of software experts: to deliver the maximum amount of value throughout the life of the engagement.
As a project manager, I enjoy my role a lot less on firm fixed price contracts. In a sense, I become more of a “traffic cop” – merely “green-or-red” lighting requirements instead of making value decisions for the customer; or even worse, being put in near-constant negotiation situations with customers as requirements change (as they inevitably do).
In summary – help your software team help you – go time and materials – go Agile.
Comments
Hear hear! Too often in
Hear hear! Too often in fixed-price contracts the scope creep can become unmanageable, because customers DO want the requirements to change, often without understanding the impact those requests will have on schedule and labor. Often in Web development (and design especially), this little change or that little change isn’t drastic, but all of those changes do add up. Working on a time-and-materials contract frees up the project team to keep the customer happy without risking pushing revenues into the red.
—Clator Butler
Director of Client Relations
Phase2 Technology
Contract Type Is Less the Issue
There really shouldn’t be any difference in managing the project work, regardless of contract. The contract is establishing the terms of the work and the costs associated to that work. Fixed-Price offers greater profit within the costing proposal while shifting risk to the vendor. Costs Reimbursable (for which Time & Materials is included) shifts that risk to the buyer, and if the buyer has done adequate market research on costs, limit the percentage of the profit within the rate. In either case, a change order is a change order and needs to be managed no differently for the project. A properly run fixed-price with incentive/award fee, even with change modifications, can provide far more profitability to the vendor and give the production team focus on efficiency as well as functionality.
Offerors resist FFP contracting in part due that adhering to rigorous change order and change control is perceived as a distraction to “getting the job done” or creates something of an adversarial relationship with the customer (oh, you want it to blink? That’s going to be an extra billion dollars…). Cost Reimbursable shouldn’t change the communication with the customer nor avoid formal modification of the base agreement. If it is the expectation from the Fixed Cost contract for a blank check of services, that is an issue needing to be managed throughout the project relationship rather than avoided by use of what may be a less effective contracting solution.
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