The hybrid, fixed price/T&M deal

In IT project delivery, there are two common commercial models.  Time and materials, or T&M, involves the client paying the supplier a day-rate for each person day they spend on the project, along with any expenses incurred along the way.  Fixed price involves the supplier quoting a fixed cost for a given scope upfront, and the client paying that fee, whether the supplier completes their obligations in lightning time or they take forever to complete the scope.  Each model comes with flaws.

In T&M, this is guaranteed income for the supplier, income that has been underwritten by the client.  So, within reason, the supplier can dawdle, making  a job that would usually take them five days last seven.  It means that the developers are fully utilised for longer, which is important to the supplier.

With the fixed price model, the supplier is encouraged to get the scope completed as fast as possible once the quote has been accepted.  This frees up the resources to be used on other accounts or other pieces of work, maximising their profit margin.  FTW.

These are very simplistic viewpoints, not allowing for morals, doing the right thing, strategic partnership and all of that bollocks, but you get the picture.

It seems that the models are flawed for almost diametrically opposite reasons.  The former promotes due diligence, attention to detail, code reviews up the ying-yang, oodles of governance etc.  The latter arguably compromises many of these necessary disciplines, getting the product ready for shipment as quickly as possible.

So, why don’t clients opt to pay the difference between the two?  The supplier still provides a fixed price quote—£100,000, for example.  If the T&M cost is lower than the quote (£80,000, say), then the client will pay £90,000.  If the T&M comes in higher (£150,000), then the client will pay £125,000.

It makes sense.  The supplier is rewarded for getting things done quickly, but this reward is less than it would have been under the fixed price model.  And if there is an over-run, the client will contribute towards the additional cost, but the supplier will still suffer as they would have done under a fixed price model, only to a lesser degree.  The model seems to remove, or at least reduce, the drivers of perverse behaviour.

It’s probably not a new concept—some form of risk/reward share between the two parties.  But it was sufficiently revolutionary—to me at least—to interrupt my intense dozing-off activity last night to allow me to tap the idea into my iPhone.

Comments

One Response to “The hybrid, fixed price/T&M deal”

  1. SLATFATF on October 9th, 2009 16:24

    Or, the supplier signs up to a fixed price deal ridiculously low priced to win the work. Then questions the scope post signing and change controls things until the price now resembles something achievable. At that point delivery begins under fixed price and the supplier mucks up the project leading to losses. So the supplier enforces further work to contract until the government is blackmailed into paying over large amounts of cash to the incompetent supplier.

    Or they walk and leave government with a steaming pile.

    Then, they hire them again for the next project.

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