Thomas OsbornManaging Director of Client Services| AltivonClifton Park, Ny, United States
In a scenario where you have a time and materials contract with a customer (i.e. at $200/hour rate) for delivery of a project, and a fixed-price subcontractor is used to deliver a portion of the project, what are acceptable ways of charging the customer for those fixed fee subcontracted services?
For example, if a standard hourly rate is known for the subcontractor (i.e. $150/hour), is it appropriate to divide the fixed fee milestones by that subcontractor rate to derive an equivalent number of hours, and then charge the customer for those calculated hours at the T&M rate in the customer-facing contract (i.e. $200/hour)? Or, is there another approach that is generally accepted under this scenario? Saving Changes...
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charles ederUtility Consultant| NextEra Energy, Trans Bay Cable LLCNovato, Ca, United States
It is inappropriate to mix fixed-price with T&M hourly rate billing. The milestone payments that you already negotiated and locked-in, should be structured with identifiable and verifiable deliverables for the subcontractor and the corresponding lump sum milestone payments invoiced separately. If you mix them, you will lose the character of the fixed-price contract.
Had you not negotiated milestone payments for the fixed-price contract, you could have included the subcontractor rate in your T&M rate card with a "not-to-exceed" clause for the subcontractor project work and you would "eat" any overage. The timecard option is better for you overall when there are scope changes that involve the subcontractor. Saving Changes...
Thomas OsbornManaging Director of Client Services| AltivonClifton Park, Ny, United States
Thank you, that was my view as well, that it was inappropriate to mix the two. I appreciate the validation.
To clarify your suggestion, there should either be a separate customer-facing contract that is also fixed price, and mirrors the milestones in the subcontracted services, OR a not-to-exceed approach should be used in place of a fixed price milestone approach both with the customer and with the subcontractor. Is that correct?
In any case, the general requirement seems to be that terms of both the customer contract and the subcontract should match, in general. Saving Changes...
T&M is the billable hours of the contractor themselves, and their expenses acceptable per contract. Subcontracting to a sub-tier supplier is part of the materials/expenses. They can charge what expenses they are due per the terms of the contract. If their subs work late, you pick up the bill.
That is the danger of the T&M contract is that the contractor just passes all expenses to the customer, and there is no incentive to be efficient. Saving Changes...
