Why choose Time and Materials vs. Fixed-Price Contracts

Mauro Taroco

Formalizing a contract’s conditions is a crucial stage of a project. There are currently two models most widely used in the industry: time and materials contracts and fixed price contracts.

In this new era of collaboration and teamwork between client and supplier, at ThinkUp, we believe that the contract for time and materials is the most beneficial for both parties for several reasons. 

In this article, we’ll tell you more about them.

What is a time and materials contract?

A time and materials contract (or T&M contract) means the client only pays for the time and materials used by the supplier in the project’s development. 

These contracts are based on modern agile development practices and have a rate card that details the fees corresponding to each team member who will work (or could work) on the project. According to the company, these rates may be hourly or daily. For example, the Designers fee is “$X per hour or day,” and the Developers fee is “$X” per hour or day.

In time and materials contracts, you establish the conditions in advance, and their mere fulfillment guarantees that the final price will be the correct one for the project without surpluses. For many clients, this type of contract usually generates doubt about whether they will not be signing a blank check. However, this is not the case, but it even turns out to be more beneficial for the client than a fixed-price contract. 

In this type of contract, the price represents the effort invested by the supplier and the service provided. It guarantees absolute transparency regarding the set amount for the materials and time taken to complete the project. One of its significant advantages is the flexibility to adapt to changes in projects that start in one way and change their planning at any stage of development.

What is a fixed-price contract?

In fixed-price contracts, the project’s monetary value is fixed in advance based on a cost projection that estimates the work hours, deadlines, and materials necessary. B2B and B2C companies often use this type of contract.

Its main advantage is that clients and suppliers know how much they will pay and receive at the end of the project in advance. However, a significant disadvantage is you can’t always predict the cost of the service. This lack of flexibility is not favorable for anyone because of this lack of precision client or supplier may be financially harmed in the transaction. For example, because the provider underestimates the cost, with the consequent loss of profits, or because it charges too high a price to avoid economic losses but loses a potential customer, or the customer pays more than necessary.

When to choose a time and materials contract?

As we said at the beginning, choosing the contract model for a project is a strategic decision for the client and the supplier. The right choice will depend on the needs and characteristics of each project and business.

For this reason, spending time analyzing your decision is critical to getting the best results. 

In industries such as IT, the time and materials required by a project can vary significantly during its development. Therefore, T&M contracts are the most transparent and fair choice.

In summary, it is convenient when there is a probability that the requirements or the needs of the project change, and you need flexibility.

T&M contracts are safe for clients and supplier 

The biggest fear of customers about this type of contract is that the supplier unnecessarily extends the project to charge more. However, it is not the case when working with trustworthy suppliers. 

T&M contracts are safe and also beneficial for both participants.

In any case, to ensure that the conditions will be satisfactory for everyone and the final price fair concerning the service, you may agree in advance on the following contractual aspects:

Person-hour price: define it per role (design, development, Project Manager (PM), etc.) and time (day or hour as defined) throughout the agreement.
Set a maximum number of working hours: based on the total amount of team-hour the supplier estimates for the project based on their experience, establish a maximum number of hours by mutual agreement. If this number exceeds, the client can obtain a preferential price for the extra hours or even not pay them. You have to define it in the contract.
Materials’ cost: to value the materials necessary for the project, you can arrange to pay (or charge)the net value of the product without additional margin. Another option is for the client to acquire the materials directly.
Close communication: close and permanent communication with the supplier is the best way to ensure the correct allocation of time and materials. A standard method of implementing this is weekly consumption reports that show the number of team hours and materials incurred and the level of progress of the project to date.
Change Orders: If the project requires adjustments that affect the estimated budget and the task schedule (more labor hours, new materials, or others), you have to document it with a change order.

Benefits

There are many benefits of working with time and materials contracts. These are some of them:

Flexible scope: allows to change, add or eliminate requirements at any time.
Team members’ flexibility: the number of people involved in the project can increase or decrease when required.
Fluid and permanent communication: weekly (or bi-weekly) status reports allow you to constantly know the level of progress and effort invested at the moment.
Greater control by the client: being permanently involved and informed about the actions, results, and progress, you can make a better evaluation of the development and the definition of the steps to follow.
The team can start working immediately: unlike in a fixed-price contract, all business, technical and product requirements do not need to be defined at the beginning of the contract. You can even start without being sure of all the project details and can review them in later sessions.

Why at ThinkUp we choose to work with T&M contracts

At ThinkUp, we choose to work with time and materials contracts because we believe that it is the best way to provide greater flexibility and transparency regarding the cost of a project.

We assign all our clients a dedicated team that works exclusively with their project, and that is, in fact, the equivalent of having an external development department. Besides, through frequent meetings, the client permanently has an updated status. Tasks and implementation times are listed daily; everyone can access this information anytime.

Why do we do it this way? Because we believe that this approach provides the confidence and transparency that guarantees the client that they are paying for the actual value of the service and not an estimate.

At ThinkUp, we choose T&M contracts because they build a working model based on trust, credibility, transparency, and constant communication. It is how we like to work: as a team with our clients. 