John Yates with some thoughts on changes in the way tech contracts are priced.
It seems like Time & Materials (T&M) is making a comeback. Ever since I first started working on technology contracts, customers have preferred the certainty of a fixed price rather than the perceived uncertainty of a rate card.
There is an understandable fear that T&M is like signing a blank cheque, but it doesn’t have to be like that.
It’s fair to say that salespeople loved (and still love) T&M contracts – better rates and margin often produced better commission, and there was a commonly held belief that these contracts were ‘no responsibility deals’, a view often shared by their own management given that these contracts were often subject to less internal governance at bid review.
T&M arrangements vary enormously in their scope and risk profile:
- projects to implement new systems
- programmes for business change and transformation
- agile software development
- consultancy and advisory work
- provision of dedicated teams to perform technology-related work, with the ability to flex the team size up or down in line with demand.
T&M is inherently more flexible than contracting for a fixed price. If customers want the certainty of a fixed price, they need to recognise that other aspects of the contract need to be fixed, such as scope, timetable, assumptions, dependencies and customer responsibilities. Inevitably things do change, which can result in complex impact assessment and change negotiations, eroding the apparent certainty of the fixed price.
Flexible does not have to mean simple – delivering a £50 million business and technology change programme is never going to be simple. The management controls (both financial and project delivery) over such a T&M contract need to be at least as rigorous as if it was for a fixed price.
Recent years have seen customers trying to have their cake and eat it by using capped fees – basically an agreed budget based on a rate card and work breakdown estimate – where the supplier can’t exceed the budget without prior approval. When approval is sought, customers may turn round and refuse approval unless there is a change of scope. And of course they don’t want lots of assumptions and caveats. And they don’t want the budget to include contingency (typically 25% or more on a fixed-price project).
T&M also gives customers much greater transparency and control over the tasks that need to be performed: “we don’t want you to do X – we’ll do it”.
Ironically, it is suppliers that often favour a fixed price these days, on the basis that they avoid micro-management and can get on and do the job.
How times change!