Cost Effectiveness: Time and Materials vs. Fixed Price Plans

JP Lessard June 19, 2015

For many years, the normal standard was for business to pay for services based on the arrangement of time and materials, or T&M. Under this arrangement, company B only pays for the time and material costs that are incurred by their provider, company A. Under a normal T&M arrangement, Company B is under no obligation to pay any kind of retainer to company A–only for services and issues that come up on an as-needed basis. Alternatively, service companies may institute a fixed price model, whereby they pay an agreed-upon amount at an agreed-upon interval, often monthly, to be covered for specific services outlined in the contract. Under the fixed price model, company A would complete any work company B needs and the cost to company B would remain the same. But which is these service models is the most cost-effective? We’ll analyze some of the impacts of each.

Time and materials model

Under the time and material model, there is an inherent back-and-forth between the two companies once the work has been completed and company B is invoiced for company A’s work. For any company, an important part of the day-to-day operations is reconciling of any invoice that comes to them. This can lead to a lot of questions as to exactly what work was done, how long it took, and an implicit negotiation of the cost that’s being quoted. As a result, both business are liable to suffer with all the additional time spent around the services.

A time and materials plan does not encourage an excellent scope of work on the part of the service provider. If we take an IT company as an example, under a T&M plan, the company is not encouraged to do proactive work for its clients. In fact, accumulating invoices for conducting proactive work is likely to cause friction with the client being charged for the work questioning the cost that is passed along to them. With any work under this model, the question returned to the service company is always, “Why are you charging us this?”

For any IT company that prides itself on the reputation of its work, the T&M model imposes a problematic disconnect between the goals of the two companies. If the IT company’s objective is to have their clients IT services run as smoothly as possible, then their clients are only paying them for the time and material used to solve their problems. Here, issues are equated with revenue. The T&M model also places a lot of responsibility on the client. They have to know when to call for help–since T&M contracts do not encourage active monitoring and proactive action, these issues could drag and become exacerbated by not being caught early.

The fixed price plan

Under a fixed price plan, the costs to the client remain the same throughout the life of the contract regardless of the time spent completing work. This means that, for an IT company, issues can be monitored and even resolved with little involvement from the client. Since there are no discussions about invoices, the IT service company has the opportunity to get out in front of issues and hopefully resolve them with little impact on the client. By turning the administration over to someone else, clients’ time spent away from IT is significantly increased, putting them in a position to spend more time and resources running their business and generating more revenue.

There may be a small sliver of circumstances where a time and materials plan is a more cost-effective option than a fixed price plan for business. This, however, requires a high degree of involvement from the business’s decision makers to stay on top of issues and ensure their service provider is being utilized to both address issues that arise and communicate the proactive measures needed by the client.

Ultimately, a fixed price plan is likely the best option for a business. With the model’s allowance for proactive work to be done by the service company, businesses spend less time querying invoices and more time focussed on generating more revenue. Both parties benefit from the same thing: issues being monitored and resolved with little involvement or effort from the client.

Do you have any thoughts on using a time and materials or a fixed price agreement? Let us know in the comments below.

 

If you would like to learn more about fixed price plans or have any other questions about IT as part of a comprehensive IT support strategy, don’t hesitate to contact us today to speak with an IT expert.





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