The struggle to end a project
Customer Viewpoint
The fixed price approach greatly reduces budgetary risks and sets a target date for
project completion. Budget overruns may still occur due to change requests to the
requirements. The greatest risk on a fixed price contract tends to be schedule overruns.
Penalties can be included for schedule slippages, but this still does not guarantee an
on-time delivery.
T&M contracts are best suited if you plan on managing or doing a majority of the work
yourself. You can then hire contractors as staff augmentation. T&M places all of the
risks on you; however, you can release contractors as desired. Also, you may realize
savings if the work is done sooner.
Vendor Viewpoint
Fixed price contracts present vendors with the greatest risk. Usually, requirements are
not well defined during the bidding process, but you as the customer want a fixed price
bid. Vendors must interpret the requirements and estimate the related work effort. To
protect themselves, vendors add contingency amounts to account for unforeseen
details. Also, language (usually listed as assumptions) is added in the proposal to
provide the vendor with controls to help manage the unknown factors.
The risk to the vendor is that the cost of providing the deliverable may be greater than
the fixed price, resulting in a financial loss. However, advances in methods or
technology may provide the vendor with the opportunity to increase the profit margin
originally targeted.
T&M contracts take the risk of losing money off the vendor. However, it limits their profit
margin to precisely the difference between the billing rate and staff costs.
Given a choice, most vendors would prefer a combination of the two approaches—
having a defined, fixed scope of work and then performing the work on a T&M basis. If
life were only this simple.
