Many businesses fall victim to arcane process and methods just because that’s how those before have always done it. I’m hear to say, “Stop doing what doesn’t work for your client.” Particularly when it comes to efforts related to growing your business and competing against your competition. Here is insight into the worst possible contractual relationship a client and vendor can enter: Time and Materials Not To Exceed (also known as T&M NTE).
Fixed Fee Vs. Hourly
Fixed-fee contracts make sense when we are delivering value and both parties can agree on the outcome or results. Time and Materials (T&M) or hourly contracts are best when we have uncertainty, are not sure of the detailed requirements, or cannot easily define the potential outcome.
Fixed-fee projects reward innovation. If the vendor can deliver the desired outcome on an accelerated schedule, then they reap the rewards of the surplus. Meaning, if the vendor anticipated 200 hours, and they deliver results in 150 hours, then they still get the money for the full value of the contract. Hence, the client received quick results, and everyone is happy.
Hourly or Time and Materials projects imply shared risk. What I mean is that if the project scope changes, new needs come up, or the client decides to change direction, the client and the vendor recognize that the client is paying incrementally based on effort… not necessarily results.
Why as a vendor (or seller) you should avoid “Time and Materials Not to Exceed”
T&M NTE means that you bill based on effort… up to a point. Some confuse this with fixed price projects. Not so much… The fixed price project rewards you if you perform efficiently. T&M NTE provides no reward if you perform ahead of schedule. But, it provides a penalty if your effort goes beyond the maximum effort. So, you get your normal margin if things go as planned, and every hour beyond the maximum erodes your margin until you end up losing money on the deal. With no upside and only downside, you should never agree to that model.
Why as a client you should avoid “Time and Materials Not to Exceed”
As a client, many organizations feel that T&M contracts amount to a blank check. So, when project outcomes are not sufficiently defined for fixed price contracts, companies feel that they can engage a vendor in a T&M NTE model. The theory is that the vendor should know what the maximum effort should be. If it takes longer than that, then the vendor cannot charge more. The challenge, however, is that if the vendor ends up being upside down on the project, at least one of three things will likely happen: 1) They will try to deliver the bare minimum to be acceptable to reach the finish line; 2) They will shift from high-value to low-value resources to theoretically reduce their losses (interesting theory that doesn’t work; or 3) They will be on a quest for all future projects to “get even.”
In terms of reward and punishment, T&M NTE does not offer a carrot… only a stick. If as a vendor your client proposes T&M NTE and you think that the maximum value is a reasonable top side, then suggest a fixed-price project. If you go that route, you could end up with the stick… but you also can be rewarded with the carrot.
Please share your biggest challenge. I may even address it in a future article.
It’s Your Turn
What horror stories do you have with various contract types?