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Time and Materials

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by julia_goins

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I am seeking opinions on the way T&M contracts should be handled...please see the following - this was actually a response to an email that I penned earlier this week:

It is my opinion that just because a project is time and materials doesn't mean we have carte blanche for billable hours until the project finishes up.

If a client signs a contract with the following verbiage:
will provide 160 hours of services toward completion of the Statements of Work described herein at a rate of $165 per hour. These services are delivered on a time and materials basis and the number of hours in this contract may not be adequate to complete the work. will be responsible for reasonable and customary business expenses incurred by in its fulfillment of this work.

I believe the client has a reasonable expectation the project costs will likely cap at $26,400.00.

Now, we do have a "this estimate may not be adequate" clause, but I still think if the project is going to exceed 20% of these costs the project manager needs to contact the account exec. They (account exec) should be informed the project is going over the contracted budget and we estimate it will take x additional hours to complete. Then it should be up to the AE to decide if he needs to contact the client regarding additional funds.

If we agree we need additional funds, I strongly feel we should have a scope change request document drafted and signed.

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I have a colleague that feels that going over an estimated value on a T&M contract does not require additional documentmentation (scope change) or approval for additional funds.

I am interested in hearing the opinion of other seasoned professionals.

Thank you.

7 replies

by bfilmfan

It is normal business practice to contact the client if the hours are going to exceed the estimate. But since the client signed the contract knowing full well that it is a T&M, they are in full knowledge that the bill may well exceed their estimate.

In other words, they have legally signed a "carte blanche." Most clients avoid a T&M contract, as their legal department is fully aware that this could leave them with a massive bill due at the end.

by sridharpandu

Hi,

In my opinion this is typical of most clients. To state facts, Clients would like to be in Control yet not take responsibility of the costs. (I am assuming that you are into software projects)

This attitude has stemmed from vendors quoting sky high prices for doing something really really small. And laying the blame on overheads like quality certifications, verifications, testing et al. (To me quality is an unstated objective and should come with any product). There is mistrust on both sides. However there is a way to break this. Use scientific estimation techniques for your project - Functions Points, COCOMO.

I have several clients who prefer to work on T&M, several more on a fixed cost approach and a few really smart ones on a hybrid mode - part fixed cost and part T&M.

To break this mistrust, I make the process of estimating the size and effort transperent to my clients. I use Function Point analysis to estimate the size of the work (www.ifpug.org for a document on FP counting practices). The moment this is done I use an industry standard productivity factor for the number of function points that can be delivered in a day by a programmer - Its about 1 FP/day for client server projects in Powerbuilder, VB etc and 0.8FP/day for java, C projects. I add the project management and Quality assurances effort (a percentage - 10 to 15%) of the FP calculated effort.

I meet the client and show the effort and hence the cost to do it in a Fixed Cost model. If the client decides to take the project management and qaulity assurance responsibilty I ensure that the contract contains the number of FP's a programmer can deliver per day. (They are humans right, they are not machines to work in several shifts continuously). The client than has a figure to compare whether taking the Project management and QA activities upon his organisation is really going to be cost effective. You'd be surprised the decision is usually in favour of a fixed cost model.

Either w

by changeadvocate

For T&M contracts, your basis of estimate (how the 160 hours was derived) is the client's primary consideration in awarding you the work. If they do not feel the estimate is reasonable you will not be awarded the job in the first place. A company awarding a T&M contract needs to know the risks involved and manage them. Legally a company is responsible for all reasonable and customary charges but they also have the right to place a ceiling value on the contract when awarded.

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