Fixed Price Vs. Time And Materials: Which Is Better For You?
When you are looking into bringing a professional IT (Information Technology) support service on board, you need to choose the pricing structure you would like to use. A Fixed Price contract offers the advantages of cost certainty, allowing you to pay no more than quoted for the duration of the project. A Time and Materials contract sometimes referred to as T&M, charges you for the variable number of hours you end up using IT. This gives you greater flexibility, but you also have the risk of the total bill far exceeding the initial estimate.
Both pricing structures are as old as contracts themselves, and neither is leaving the marketplace anytime soon. However, there is probably a clear choice that best suits your needs. This article will help you determine which pricing structure is right for you by looking at some of the advantages and disadvantages of each.
Table of Contents
Time and Materials or T&M Contracts
T&M Contracts are frequently used for projects that are very hard to provide an accurate estimate for. They are also utilised for projects that have a variable schedule. This latter point is especially relevant for IT services, as it is nearly impossible to predict how often you will need services over a given period.
In general, T&M Contracts favour vendors. The owner assumes the risk that the vendor will need to spend more time with them than initially quoted and must pay for the difference, regardless of the estimate included in the contract.
A contractor could also make less than the initial quote, but they also invested less time and materials than they thought they would have to in that case. Thus, the downside for the vendor (doing less work and receiving less money as a result) is nowhere near as bad as it is for the owner to receive an unexpected bill.
That said, it is possible to negotiate a more equitable arrangement with us so that we share in this risk. Here are some of the items that we can be flexible on in T&M Contracts:
This is how much we charge per hour and includes all personnel, including those in administrative positions. If you have a larger company with a large anticipated need for IT support, we would be happy to lower this hourly rate to secure your business.
We usually try to profit whenever we need to install a new part to get your systems up and running again. The usual markup is 15-35 percent depending on the item, but we can work with you if that does not fit into your budget.
This is one of the most important riders we offer to our customers. A Not-To-Exceed clause in a T&M Contract caps how much money you are liable to pay even if your need for IT services far exceeds our initial quote. This significantly decreases your share of the risk.
Some clients also appreciate that a Not-To-Exceed clause improves efficiency by ensuring that the contractor never intentionally dawdles to rack up more billable hours. We would not do that, but some unscrupulous IT support services do so we understand the concern.
Maximum Labour Hours
This is similar to a Not-To-Exceed clause but covers only labour hours instead of the total bill. Its primary purpose is to ensure contractor efficiency in the manner described above.
Time and Material Contracts Drawbacks
Ultimately, the decision between Fixed Price and T&M pricing models comes down to your needs. The best way to determine which one is right for you is to ask yourself the series of question below:
Do You Know Exactly What You Need?
Fixed price contracts depend on knowing exactly what you want to be done so that we may provide an accurate estimate. If you are unsure of the scope of your project, it is unreasonable to expect us to come up with a workable bid. A “discovery” period under a T&M Contract is probably in your best interest until all parties involved have a greater understanding of what you are looking for. At that point, you have the option of switching to a fixed pricing model.
What Is Risk Management Worth To You?
Fixed Price Contracts offer you the security of a set price that will not be exceeded. That is easy to budget for, but you may pay a premium for the convenience. For instance, we might quote a job at $300,000 as a fixed price but only $250,000 under a T&M model. The reason why is simple: we need to overshoot on a fixed rate in case something unforeseen goes awry, but the nature of T&M takes care of that possibility for us.
How Important Is Flexibility To You?
If you want the flexibility of accessing IT support whenever you need it, a T&M pricing structure allows you to do so. We are charging you by the hour, so you can largely dictate what we do on your dime. It is also much easier to change what you want to be done on the fly under a T&M model, as the contract does not set anything in stone.
Fixed price contracts tend to involve us working on our own to achieve the results you specified, so you lose some control of the process. Changing anything requires renegotiation and a few added fees, compromising the flexibility of the arrangement consideration. There are ways to make fixed pricing structures more flexible, but in general T&M arrangements give you much more freedom.
To sum up, fixed pricing models are easy to budget for and minimise your risk at the cost of flexibility. Time and Materials arrangements are much more flexible and cheaper if everything goes according to plan, but riskier if your needs exceed the quoted estimate. Which one is a better fit for you?