What are you signing up for when you do Fixed bid, Time & Material contracts?

In the last 10 years, very little has changed in terms of the understanding of outsourcing, by first generation entrepreneurs. While so much has been said and written about the enterprise outsourcing space, the dissemination of knowledge and best practices has hardly percolated to SMBs, Startups and to some extent, midmarket firms.

Today, we shall explore the most prominent models of outsourcing software development – Time & matieral and Fixed Bid.

The decision between the two boils down to Responsibility.

[tweetherder]In a time & material project, the unit of procurement is ‘time'[/tweetherder]. That’s so plain and obvious, but often the buyers miss that point. The seller or the outsourcing company, simply allocates a committed number of hours for you. Whether the hours are utilized to watch cat videos or develop software, is completely your responsibility. It’s for this reason, you are allowed to interview the people allocated to you, so that you can assess if they can do the job that you’d like them to do.

The assumptions made here are:

1. You know what exactly to do

2. You know in what order to accomplish things

3. You can evaluate and decide who should be allocated for you to get the work done

4. You can verify, validate the work output and manage, mentor the team towards productivity
Not all buyers of software development can do all of these. But that does not stop you from doing your home work. At least have complete control over point 1 and 2. That’s homework which you ought to do before commiting to procuring time. [tweetherder]What worth it is to procure time but not manage it efficiently?[/tweetherder]

Beyond points 1 and 2, you’ve to either hire a specialist who could guide you with 3 & 4 or simply trust your vendor that they put the right people and generally work towards producing efficiently. Scary? Yes, that’s why you need to verify the credentials of a vendor and the team allocated to you, before you trust them on time & material work.

Since you own much of the direct responsibility in a time & material project, the vendor’s risks are very minimal. So your spend is lesser when compared to a fixed bid project.

Outsourcing Contracts - Responsibility Chart


Outsourcing Contracts – Responsibility Chart



Reading the chart: In fixed bid, after the project starts (with the requirements documentation phase), you as a buyer have (theoretically) the least responsibility. But in reality it tends to approach as much as that of the vendor, to avoid delays and scope creeps (due to mis-execution/interpretation). In T&M deals, you as a buyer have great responsibility in educating the developers right upfront, so that they are set in the right path and you play the role of the tester with all rigor, because, closure rests in your hands and more time actually means more  revenue for the vendor!

In a fixed bid project, the unit of procurement is a product, feature, application or a verifiable and pre-agreed work product.


The vendor takes the responsibility of understanding your expectations and requirements. S/he then estimates for the work and commits to delivering your work product in that pre-agreed time period and generally commits to a cost. In such a case you don’t have the control over who is put into your team. Irrespective of who they put, they’ve taken the responsibility to deliver a work product within a time period.

Your responsibility is less when compared to that of the vendor and so they carry the ‘execution risk’. Hence, in fixed bid projects your cost tends to be higher than if it were to be a time and material project.

The assumptions made here are:

1. You know what exactly to do and the vendor understands your expectations very clearly

2. The estimation is realistic

In reality, changes crop up during execution. You have missed out some finer details. The vendor has under-estimated the technical challenges. Here’s where the art of negotiation takes over. [tweetherder]When to negotiate and when to cut slack is something you need to know as a buyer. [/tweetherder]Every change request that’s due to lack of detailing, costs you money and its for you both to decide if the missed out finer details are generally accepted expectations or things that range from ‘out of ordinary’ to exotic.

If technology challenges were under-estimated, its again for you to arrive at whether its the lack of skill and foresight on the vendor’s part or if it is just the nature of the beast. These conclusions cost you money and often times, relationship. There is a hidden cost to taking extremes. If you are too lenient you are losing money. If you are too rigid, again you are losing money (by moving work to another vendor who has the learning cost).

So, the notion that fixed bid somehow limits your exposure to escalating time and price is a myth. Contracts come with riders and for fixed bid projects, change requests is a rider.

Like all project based businesses, its better to plan and allocate for time and cost over-runs. The success of the project depends on how much you could reign in the slippage and keep it at a bare minimum.

What has been your experience with any of these models?

Have a lot to share? Why don’t you write a guest post on our blog? Email us at info at contractiq.com, for contributing as a guest.



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