Fixed Price or T&M?
Although the contract states T&M, we work on a fixed price basis.
In other words, the contract was intended to operate under the T&M business model, but in fact the work is carried out under the fixed price model.
The result: loss of funds, inefficient use of resources. If you are familiar with this situation, you are not alone. Let me tell you what we have encountered in practice and how we solved our clients’ problems.
T&M and Fixed price: a brief overview of the difference in approaches
Both models — fixed price and Time and Materials — can be effective in different scenarios.
For example, if you have a detailed and clear statement of work (SOW), a dedicated team, and a calculated timeframe, you can fix the price. In this case, the risks are mainly related to the professionalism of the developer. However, if there are ambiguities in the customer’s requirements, the business model is not tested, or there is no clear SOW and deadlines, it is better to use the Time and Materials model. In this case, the cost of the project will depend on time and resources, and the customer will have the opportunity to actively influence the development process by making changes and adjusting requirements. This approach allows you to flexibly adapt to changes and avoid unforeseen risks.
Below are a couple of examples from our practice and recommendations that we recommend including in contracts.
Example 1.
A fairly common case is a misunderstanding of the T&M model by the client. In particular, the client wants to specify the date of completion of a certain stage or even the entire project and set penalties for violation. However, in this case, the client does not often realize that the absence of a complete and clear T&M may lead to changes in the scope of services during the process of their provision, as services are often provided iteratively (in sprints), and depending on the client’s wishes or comments, additional tasks may arise. Accordingly, this may affect the timing and cost of services, which the developer cannot always predict in advance.
1. In this case, we recommend explaining the processes in detail to the client. It should be conveyed that it is difficult to predict the exact number of hours at the time of the contract conclusion.
2. Of course, some of our clients cannot sign a contract immediately in accordance with the T&M principles. In this case, as an alternative, you can offer a fixed price for a small part of the work, so that the client can see the level of your professionalism and have confidence.
Example 2.
It is also not uncommon for your client to change the parameters of a T&M agreement to a set fee without explanation, even if the T&M model was agreed upon throughout the negotiation process. Why? Because the lawyers who do not work in IT are more likely to be familiar with this payment mechanism. As a result, all of the lawyers’ recommendations are empathetically and sensitively rejected, with comments that read like a crash course in IT. As a result, both parties sign the agreement in its original form. (Yes, we negotiate on the client’s behalf, relieving them from contractual difficulties).
Example 3.
Another case is the client’s requirement to prescribe the CAP (i.e., maximum limits) of cost and time. In this way, the client tries to provide a framework to the developer and then demand additional services at no additional cost. Sometimes this is due to an imperfect understanding of the T&M model, and often due to the client’s frank desire to transfer the risks of an incorrectly estimated cost of services to the contractor. Furthermore, such fixation can take on quite unusual forms: a client’s representative working on the contract may not even realize that the client has set a fixed price with his or her modifications.
In such a case, make sure that the contract contains “estimated price”, “approximate terms”, “based on the approximate calculation”, and so on in the terms/price sections. If you have a contract governed by Ukrainian law, we recommend that you specify in the subject matter of the contract that it is the so-called “man-hours” that are provided, and not the finished product, which is more appropriate under Ukrainian law in terms of T&M. And don’t think that just leaving “T&M” in the contract’s name or subject matter is enough to deliver services based on the T&M model rather than the fixed pricing. It is also vital to note that any adjustments, whether significant or minor, are tallied as contractor hours.
If you can’t agree on T&M
Sometimes, when there is a strong desire to take on a project, whether due to interest in the client or project, the need to sell the team, or a lack of arguments in talks with the client, the contractor executes a fixed-price contract with no defined T&M. This entails risks, so it is necessary to fix the scope of work as much as possible at this stage, to provide a precise definition of “edits”: which are paid separately and in what order, to provide for the transfer of intellectual property rights only after full payment, to determine the client’s obligations regarding feedback timing, to try to fix floating deadlines, and so on.
Good luck with your negotiations and projects!)
Ilona Chuta. Attorney at law, LLM. Co-founder at Digilaw
