Why do we recommend Time & Materials?

Erik Osterman

Time & Materials (T&M) projects align our goals with yours. Our company will work with you until your needs are met irrespective of the actual deliverables, providing the greatest likelihood of a successful outcome—everyone's end goal. This will allow you to realize a final product that meets or exceeds your expectations and prevents you from being held financially responsible for software that does not help you reach your objectives. It rewards the company for working harder to satisfy those needs or saves you money if the needs are met with less effort. More importantly, it gives you the maximum agility to decide what you need as the project progresses and to pivot at any time. Is there some new feature you just thought of and want right away? We'll get right on that. Something you thought you were going to need but now realize can wait until next year? We're happy to skip that and move on to what you care about most, even if that is different from what it was last week.

Fixed-fee (or Fixed-bid) projects are based on the outdated “waterfall” model where you define everything you are going to need to finish the project before work on the deliverables even starts. On top of locking you into a rigid set of deliverables before you are even sure that is what you want, they require significant extra time and effort (as much as 50% of the total project time) to define “acceptance criteria”, which is a mutually agreed set of tests that, when passed, define the project as finished. In addition, fixed-price bids transfer completion risk to the company, so a company is wise to double the estimated T&M and add 20% (the extra 20% is for all the time spent negotiating the acceptance criteria.) 🙂 Fixed-price bids incentivize the company to ignore your actual needs and focus on delivering the bare minimum to satisfy the acceptance criteria. Was there something important to you that you forgot to capture in the acceptance criteria? Sorry, that is “out of scope”; we will get to it on the next project. This is how the big consulting companies got so big. They know your “waterfall” project will fail, leading to a follow-on waterfall project to fix it, except that, too, will fail for the same reasons, leading to a never-ending stream of work for the consultants. They fatten their profits by charging for all the extra work which fixed-bid contracts require, and keep you on the hook by taking advantage of the “sunk cost fallacy.”

Time and Materials Not To Exceed (T&M NTE) has a couple of ways of working. At its worst, it has all the problems of a Fixed-fee project but it takes away any incentive for the company to give you a good rate. It caps the company’s profits but not their losses. No company can agree to this model and stay in business.

There is a second form of T&M NTE, that larger companies with more complex governance, budget, and financial control systems might prefer. It’s mostly the same, except with built-in circuit breakers ensuring that budget and finance departments will retain oversight so that if a project balloons in scope, appropriate people will be called in to review and triage features before the project becomes an unexpected drain on resources. It is important for all concerned to understand that there is no commitment to “finishing” a T&M NTE project because such a project does not have a defined, agreed-upon endpoint. Still, the company is incentivized to meet expectations with the given budget and to help identify cost savings where appropriate, in the hope of securing additional work on the ongoing project. Larger companies with more bureaucratic management and more sophisticated budgetary and financial controls may prefer this, while smaller, more nimble companies know that a standard T&M contract is tacitly a Not To Exceed in that it can be canceled at any time, for exceeding the budget or any other reason.

We prefer T&M projects because it eliminates the need for either side to argue about ambiguities in the project definitions. Nobody needs to be convinced that the deliverables are acceptable or unacceptable. Instead, we deliver to the best of our ability what we understood our customers wanted. If the customer wants something else, whether it is because their needs changed in the interim or they asked for the wrong thing in the first place, we can just accept that they want something different and get right to work delivering that. Your acceptance criteria can be whatever you want, from fully-automated tests to feedback surveys, and anything you want to be done differently, we are happy to do it. When working with T&M, we are truly on your side.