We often think of contracts in terms of dollars and cents, but not all contracts are created equal. Many organizations—and others in our industry—work within the confines of a “fixed fee” Statement of Work (SOW), but are often unaware of the benefits of a SOW centered around a “time and materials” (T&M) approach.
In our field, T&M is an approach in a contract or work agreement in which the client agrees to pay the hired firm based upon the time spent by the firm’s employees to do the work, and for the materials used in the project—no matter how much work is required to complete the project.
While there are benefits to a fixed fee SOW, such as clearly-defined deliverables and a fixed project cost, this approach leaves some things to be desired.
Common objections to a fixed fee approach that we usually hear include:
- A lack of flexibility around scope (which results in the need for a rigid change order process)
- Limited partner collaboration opportunities
- Inherent use of the waterfall methodology as opposed to Agile.
- Typically, a higher cost, since estimates may be padded to reduce risk from the vendor’s perspective knowing that other factors are inflexible.
The T&M format of an SOW removes a lot of these common frustrations. Here are some of our favorite things about this approach, plus some information about why we tend to favor it here at Think Company.
Benefits of a T&M Contract
We’re all about open communication and collaboration with our teams. Having a bucket of hours to dedicate to an end result allows us to work with our clients rather than disappearing for a few weeks and coming back with a design or recommendation that may or may not hit the mark—just because the project timeline says so.
No Contingency Budget
Fixed fee estimates often also include a hidden contingency budget used by the team to accommodate unanticipated issues encountered on the project. If no issues are encountered, this becomes pure profit for the agency.
We prefer the most transparent approach. T&M projects don’t add contingency—because if an unanticipated issue is encountered, it is shared by the team and a direction is determined collaboratively with the client.
Additionally, the client is only billed for the work that is done by the team. So if the team discovers any efficiencies or experiences any reduction in scope, the project cost goes down—whereas in a fixed fee model, the client pays the proposed fees regardless of how the work is done.
An ongoing open dialogue gives our clients an opportunity to tell us early and often when something doesn’t feel right, if there’s been a sudden shift in priority, or if new information has come to light that will influence the project. We can then course-correct in real time, as T&M projects naturally allow for a simpler change order process.
This increased flexibility also allows teams to focus on solutions and not worry about sticking to outdated requirements. Fixed fee projects limit your ability to adjust in-flight project plans, and we prefer ongoing iteration that builds upon approved elements—creating a more efficient process along the way to delivering better work.
Adaptability and a Quick Starting Process
In the world of development and design, things are always changing. New technologies are emerging while business requirements are evolving. Since priorities can more easily change during a T&M project, projects can begin more quickly than with a fixed fee SOW. Contracts do not need to be so tightly defined at their onset since there is room to adapt to new information. If you have basic requirements to get started, some of the final pieces can be discovered along the way—all resulting in a better end product than if you were tied to the original project requirements.
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While a T&M approach to developing contracts may seem intimidating, remember that there are advantages that can make all the difference in moving your project and organization forward. We’re committed to working with our clients to find a solution that fits their specific goals and needs. Sometimes, that means a hybrid of fixed fee and T&M—the best of both worlds. Whichever you decide, our project management team is dedicated to making sure your project comes in on-budget, on-time, and within scope.