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Customer, do you want Time & Materials or Fixed Price Consulting Services?

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If you require IT professional services from consultants, do you know that you can often have the choice between obtaining the services on a Time and Materials basis (T&M) or on a Fixed Priced basis?  One of them can be much better for you.  Or, said differently, one of them can be a very bad choice.  This article helps you understand the difference between them and how to select the best one for your needs.   The same principles also apply to various situations where you might contract for professional services in your personal life.


1.  What’s the Difference between the two?

In a T&M engagement, the customer is paying for the time spent (a skilled warm body) and any required materials; but under a Fixed Price engagement the customer is paying a fixed amount for one or more deliverables (predefined work products), no matter how much time, people or materials the consultant uses.


2.  Situations for deciding between the two

Situations suggesting a Fixed Price basis
a)      The customer has a defined, final, work product that should be produced by the consultant with little or no development effort by the customer.
b)       The final, and any intermediate, work-products can be specified in terms of mutually acceptable descriptions and acceptance criteria before the parties agree to the engagement.*
c)      The consultant will employ and / or integrate multiple skill sets to achieve the desired result.
d)      Close supervision of the consultant is either inappropriate or not practical.
Situations suggesting a T&M basis
a)      The customer is positioned to supervise defined or special skill sets in support of ongoing or project activities.  This is often referred to as staff augmentation.
or
b)      The completed work product cannot be easily specified in advance nor can it be divided into a few reasonable definable phases.*
* Note: Many complex projects can be factored into separately defined phases that can be reasonably well defined for a Fixed Price engagement once they are separated.  For example: Consider separating an engagement into independent sequential engagements for Requirements Definition, Design / Development, and Implementation phases.  Acceptance criteria for these can be (in order of preference): (a) specific acceptance criteria agreed upon before the engagement; (b) conformance to a statement of business requirements agreed upon before the engagement; or (c) customer's reasonable satisfaction with the results.

Examples of T&M services as a better or easier fit for customers:
(Where persons with defined skills are required for management by the customer, usually for a short term)

Programmers, web designers, computer operators, help desk personnel, clerical staff and others who work and would be reimbursed for authorized expenses as though they were employees.

Messenger services to deliver and pickup packages from the post office or local customers.
Examples of Fixed Price services as a better or easier fit for customers**:
(Where an end-result or ongoing function is required that is well defined and measurable)

Professional service proposals for defined deliverables such as scheduled preventative maintenance services, extended warranty services coverage, install specified upgrades to all of customer’s computers, develop a project or implementation plan, review and report a company’s security procedures and vulnerabilities compared to best practices and others in the same industry, website design and implementation, recommend and setup computer systems, etc.

Help center (where procedures, volumes, exact services, service levels, etc. are agreed upon in advance)
** Note: From the customer’s viewpoint, these Fixed Price examples would usually be a bad choice as T&M engagements.  The reason for this is that the consultant is claiming to have the experience and expertise that the customer lacks. This makes a strong argument that the consultant should be secure in its estimate and the variables that might be encountered.  Therefore, the consultant, not the customer, should usually be the one taking the risks of a successful conclusion within the estimate.  The burden of risk is on the consultant for a Fixed Price engagement, but that burden is on the customer for a T&M engagement.  Nevertheless, the consultant is only responsible for the defined deliverables in a Fixed Price engagement, but the customer is at risk for not having them defined properly or completely before starting.

3.  T&M Advantages and Disadvantages for Customer

Advantages
a)      Easy to specify required skill sets.
b)      Engagement commences earlier because of relatively little negotiation required.
Disadvantages
a)      Significant supervision and coordination may be required.
b)      The risk of successful completion is entirely with the customer.
c)      No assurance that the project will be completed as planned, and consultant usually gets paid while working on site, but awaiting input and direction.
d)      Greater likelihood of cost overruns.

4.  Fixed Price Advantages and Disadvantages for Customer

Advantages
a)      Risk of successful completion is transferred mostly to consultant.
b)      Relatively little supervision may be required.
c)      Assurances that project will be completed as planned and according to cost projections.
d)      Keeps project under customer’s control (by mutual agreement as to requirements) and identifies potential problems up-front or eliminates them altogether.
Disadvantages
a)      Requires ability and time to adequately define deliverables and acceptance criteria.
b)      If requirements are not defined properly, customer is usually obligated to pay in accordance with what was agreed upon.

This article explained how different situations suggest the better choice for the customer between a Time and Materials (T&M) and a Fixed Price consulting engagement.  It told the advantages and disadvantages that each has for the customer.  The attachment provides the same information, in table format.  
Deciding-Between-Fixed-Price-Or-.doc

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Author:WaterStreet
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by:WaterStreet

For those who like this article and might want to see one written for the consultant's benefit, I've opened an EE question thread as a way of interviewing consultants in order to confirm or reject some assumptions for the article.

The following posting in my thread gives a good entry point into what I'm looking for:

http://www.experts-exchange.com/Other/Miscellaneous/Q_26781856.html#a34754919
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