Contracting Tips: Fixed Bid vs. T&M

There are essentially two types of billing for contract work:  Fixed Bid or Time & Materials.  Both have their advantages and disadvantages.  And you'd better know up-front which one your client has in mind before you start talking about money.

A Fixed Bid contract is just like it sounds.  You bid that you can do a defined set of work for a fixed amount of money.  If you are more efficient at doing the work, you make more money per hour of work done.  If you are inefficient, or worse, overlooked something about the project (or you allowed scope-creep), you can spend a lot of time and end up bringing your effective rate per hour way down, possibly even losing money on the project if you really blow it.

A Time & Materials contract is similar to being an hourly employee, at least in that you are paid a set rate for the actual hours that you worked, and you may be reimbursed for specific expenses such as hardware that you purchase for the company.  You don't work, you don't get paid (see my notes about unpaid holidays for more on this).  If you are efficient, you might make less money overall, but if scope-creep enters in, you still get paid for all of your work.  (Scope-creep is when you allow the defined set of boundaries for the work to be expanded.  A telltale sign this is happening is when you hear someone say, “As long as we're doing that, let's...”.)

On almost every project I have ever worked, the manager will ask for an estimate before agreeing to have you do the work.  It is ABSOLUTELY CRITICAL that before you provide an estimate, you know whether you're talking about a fixed bid or a T&M arrangement.  Either way, you should give some serious analysis to the requirements of the project.  But if it's going to be a fixed bid arrangement, you don't give estimates, you only give bids, and you'd better be prepared to live or die by them.  It is amazing how tightly people will hold onto any estimate you give them and will judge your performance based on whether you met that estimate.  This happens even when the requirements change and you directly tell them that the estimate is no longer valid.  If this happens, I suggest you quickly give them a new estimate to hold onto so they forget the original.  Or so they really know how much their “little” change is going to cost in both time and money.

I have been unfairly judged in the past because I didn't know that I should give a new estimate when the project changed, but no new estimate was requested.  It can get really tense when your client is threatening to not pay, or when he does pay, and then proceeds to bad-mouth you.  Prevention is a better way, so give them an estimate even if they didn't ask for one.  (The one exception I can think of is when you're working in a staff augmentation role, but even then, time estimates are good, even when the cost is essentially fixed.)

posted @ Saturday, January 03, 2004 5:44 PM


Comments on this entry:

# re: Contracting Tips: Fixed Bid vs. T&M

Left by Shankar Dutt Kabdal at 5/21/2004 2:18 AM
Excellent read. BTW, is there any cost benefit analysis report available for a project to be executed in Fixed Bid vs T&M basis?

# re: Contracting Tips: Fixed Bid vs. T&M

Left by AjarnMark at 5/21/2004 9:06 AM
I don't know of any standard report like that, but I would suspect that large consulting firms might have something they use internally. To me it's more art than science, based on a variety of factors such as my knowledge of the client's tendency toward scope creep, how clearly defined the requirements are, the size of the project, the client's needs, etc.

On occasion I have started with a fixed-bid project in order to avoid discussing my hourly rate and land a new client. Smaller clients are sometimes stunned when I tell them what my hourly billing rate is, but can swallow that the whole project will cost X, even if that bid is based on my normal rate. So to avoid the tension, I'll talk in terms of the total cost of the project. Also, smaller clients tend to be more comfortable knowing what the total cost will be and do not like the risk associated with a T&M estimate.

# re: Contracting Tips: Fixed Bid vs. T&M

Left by sunil pati at 1/11/2006 11:43 PM

My Query is on The Fixed Bid Project Management and Scope-Creeping.

When we defined set of work for a fixed amount of money with a deadline(for ex:For the Year 2006) but with in the defined set of work :
1)If any changes comes then what?
2)If multiple changes comes then what?
3)If change in plan comes then what?
4)Because of any points from above dead line needs to be extended then are we suppose to go for T&M saying scope in creep?

Please provide your expertise for the above queries.

Thank You,
Sunil Pati

# re: Contracting Tips: Fixed Bid vs. T&M

Left by Pradeep at 1/16/2006 11:02 AM
This is where Change management skills come around handy. Assuming that scope is well defined and documented before bidding for fixed price project, one should create a CR (change request) for every change request coming from client. Change request could be an addition/modification/deletion of the functionality. Now these requests should be documented as CRs and should follow a separate track starting with its impact analysis and estimates on extra efforts.

# re: Contracting Tips: Fixed Bid vs. T&M

Left by Sreenandan at 7/12/2006 6:42 AM
Excellent info

# re: Contracting Tips: Fixed Bid vs. T&M

Left by Richard Bailey at 8/22/2006 2:00 AM
Well, I would have to say that I don't beleive in fixed price contracts for software development.

I have never in the past 10 years of software development worked on a project where change was not necessary. Fixed price contract tends to favour one side or another, typically in most cases the client.

My approach is the following:
1) Design mockups - Either static html pages for web applications or forms for Windows Applications.
2) Based upon the mockups I would break the functionality down into the smallest components possible, so I could deliver something every two weeks.
3) With each component I would give an estimate on how long each task within the component should take.

To date I have found this approach has worked extremely well.

# re: Contracting Tips: Fixed Bid vs. T&M

Left by Alex at 10/19/2006 1:07 PM
Fixed bid would work perfectly and I have executed fixed bid project for around 4 years now. As mentioned earlier, the fixed project's success really depends on how change is managed. Change request process is the real catch in fixed bid project. A seperate Change request, estimate and plan should be prepared and approved by the client before its implemented, the change in the cost should be adjusted after the new Statement of Work is approved by both the vendor and the client
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