Fixed Price Vs Time & Materials – which is best for the customer?

Since 2008 we have provided mechanical design and engineering services using a number of financing models; including Fixed Price, Time & Materials and occasionally profit share. But if you directly compared fixed price vs time and materials, which of the two really come out on top for project costings?

Fixed Price model

The Fixed Price model is probably the most popular among new clients as it keeps spend to within a limit of liability.  

All Fixed Price quotations produced by WDS are generated from the “bottom-up” in the form of a Statement of Work (SoW).  The SoW is a comprehensive listing of tasks that are each individually costed.  The implication here is that if a task is not on the list then it is out of scope, that is, outside the agreement.  

One of my favorite sayings: “Fixed Price means Fixed Scope”.

My experience is that we tend to look at the world “through rose coloured spectacles”, as if everything will go just as we would want it to.  The reality of designing something new is that we face unknowns, and the more we don’t know, the greater the risk of there being unforeseen obstacles to be overcome.  With this in mind I apply an overall contingency to cover underestimates resulting from my lack of ability to foresee obstacles and to bring the work to a timely conclusion. The contingency is usually somewhere between zero and 20%.   Importantly, the contingency covers the work that I know is in scope and most definitely NOT work that we do not know about!

Causes of underestimation

A list of the most likely causes of underestimating follows:

• When innovating and/or working with new or unknown technologies
• Working with overseas suppliers, especially where there are language &/or cultural barriers and time differences
• Not being in control of all aspects of the project, e.g. having a 3^rd party manage the build or test of prototypes.  It’s often quicker to do some things yourself than to give all the information to others in a concise form.
• Working within a highly collaborative or interactive team.  Thought to be good for the program overall but not so good for managing time to within budget. 
• Working on highly accelerated projects.  To get things done in the quickest time possible you usually need to be assigned full-time and working flat-out 
• Working with customers that are themselves inexperienced in product development, are indecisive or that change their minds.
• When projects stop, start, become protracted or otherwise overrun.  In such cases our effort is stretched over a longer time period but we rarely get to stop and start the work efficiently.

Key milestones

When structuring a Fixed Price proposal I propose some key milestones.  These have a number of important functions that benefit both parties:

• They signal the successful completion & acceptance of the work done in the preceding phase
• They trigger a phase payment (only if the phase is completed fully and the outcome acceptable)
• Provide a go/no-go decision point: they signal the start (or not) for the next phase.  This gives the client the opportunity to stop the project at a “natural” break if deemed appropriate.

All fixed price quotations feature a table proposing the key milestones, payment and dates.  The number, content, timing and cost of the milestones will be entirely dependent on the job in hand and so there is no “one template fits all”.  However, this blog was written in our early days with potentially complex datacomms equipment in mind but it does illustrate the point about the milestone phases.

Time & Materials model

As an alternative to Fixed Price we can also work on a Time & Materials (T&M) basis.  This model is perfect when the Scope of Work cannot be rigidly defined or when the client requires flexibility to change the project scope, direction, timescales and deliverables.  When working T&M we record our working time to the nearest 6 minutes (0.1 hour) and only charge for actual time spent on the project.  The hourly rates used for Time & Materials and for Fixed Price costing are the same.

When embarking on a T&M contract I like to generate a Rough Order of Magnitude (ROM) cost where I possibly can, as I believe it is important for the client to know what they are likely to be getting into.

So, which is better for the client?

A sensible middle ground

In theory, if I were able to foresee the future and produce a quote that is 100% accurate then Time & Materials would be cheaper, as no contingency is added.  The reality is that we always like to “go the extra mile” and deliver value to the client, so if the scope of work can be accurately defined then Fixed Price is good for the client. 

However, the addition of out-of-scope tasks is disruptive to the project as it requires management activity in identifying, agreeing, tracking and managing those additional activities. 

A good middle-ground for all parties is to use T&M until the Concept Ready milestone, followed by Fixed Price for subsequent detail design & documentation activities.  By following the structure of our development process, we ensure that we will do the necessary engineering and/or investigations that de-risk the design activity and thus set-up favorable conditions for the remainder of the project to be Fixed Price.

Warley Design offers mechanical design, engineering and product development services to a broad range of industries. Have a project in mind? Call us now on Tel: +44 (0)1277 261066 or email us at info@warleydesign.co.uk

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