T&M project. In FB project, the scope is fixed and if the scope changes, the buyer may have to pay more or less, depending upon the scope change. Usually, the PMs rigorously watch the scope in this type.
In T&M project, the scope does not have to be fixed. In projects with not fixed requirements, it is best to go to T&M project type. Saving Changes...
Sachin DhaygudeFreelance trainer and consultant| www.scrumfusion.comPune, Maharashtra, India
Hi Maria, Thanks for your response.
Well, my question was Which contract type, between cost reimbursable and time & material is more flexible? Not between fixed price and T&M.
It's clear to me that T&M offers more flexibility for scope change than FP.
It would be great if you can let me know your valuable opinion on this. Saving Changes...
Bernard GorePortfolio, Programme & Project Professional| NZ PoliceWellington, New Zealand
I assume by cost reimbursable you mean what is more commonly called cost-plus.
I really can't see any difference - in fact cost-plus is a form of T&M, the only way it differs is in how time rates etc are calculated - in T&M they are an established rate card, whereas in cist-plus they are calculated from the actual cost. These are tasks that will not change signficantly under a scope change. Saving Changes...
Hmm, when you said cost reimbursable and T&M, I assumed FP. No, I've not come across the term "cost reimbursable" in my projects so far, and when you decide on the contract type, pls do let us know here. I'd like to know about a real-case scenario where such a contract type is used. Saving Changes...
However admittedly this doesn't answer the question very well. It would be good to see examples of both contract types to help understand the differences in detail and their pros and cons. Saving Changes...
Sachin DhaygudeFreelance trainer and consultant| www.scrumfusion.comPune, Maharashtra, India
Hi All,
Thanks a lot for your responses.
Following is my understanding of T&M and cost reimbursable contracts. I would appreciate your feedback / comments on the same.
1) cost reimbursable (or cost plus) contracts - This type of arrangement between buyer and seller is useful when buyer doesn't know exactly what s/he wants. Scope can't be defined at the outset. So, buyer agrees to pay for all legitimate costs incurred, plus some fee (profit) to seller. However, this would mean a lot of hassles for both parties to keep track of invoice raised for each cost incurred, ensure that it's a legitimate cost, etc. There would be a lot of administrative overhead (especially for large work)
2) T&M - This type of contract is an arrangement where as well the buyer may not know exactly what s/he wants. Scope can't be defined at the outset. However, both buyer and seller want to avoid or minimize the hassles involved in a typical cost reimbursable arrangement. So they agree upon a fixed "unit rate" for the commodity being traded between buyer and seller. In staff augmentation scenario it would be rate per person per day for certain type of resource. This unit rate is supposed to be fixed at the outset and would remain fix throughout project.
Thus, in my opinion, T&M retains flexibility for scope changes from cost reimbursable contracts and also minimize the hassles of keeping track of costs incurred throughout the project (by locking a fixed unit rate). At any time, if a buyer wishes to vary scope, he can easily ask seller for changes. However, between the two contract types, T&M makes it more easy to predict, track and control costs.
Therefore, I think T&M is more flexible or an easier option than cost reimbursable option when you may not know exact scope and expect many changes. Saving Changes...
Bernard GorePortfolio, Programme & Project Professional| NZ PoliceWellington, New Zealand
Hi Sachin
Your characterisation of when these types are used is correct, but not complete - as well as being used when scope is uncertain, they are useful when scope, in terms of end deliverables, is clear, but effort to get there is not - often the case with "bleeding edge" and innovation projects, which are beyond what anyone has good experience of.
This works well where there is a good measure of trust and trustworthiness between the parties, where funds are not too tightly constrained, and the parties effectively work in "partnership".
I've had the experience of managing a few of these - and they do present extra challenges, but can also be very rewarding to PM and participate in. Saving Changes...
Sachin DhaygudeFreelance trainer and consultant| www.scrumfusion.comPune, Maharashtra, India
Hi Bernard,
Thanks for your feedback. I agree with your thoughts. Saving Changes...
I am not sure that the contract type is necessarily the deciding factor on the ease of implementing changes to a project. It would be how in the contract you decide on how change is to be handled, that is, defined, costed, agreed, and authorised. Who makes the go/no go decision to the change? What is the level of authority in the organisatoin (could be financial delegation) as to who can approve changes of what magnitude.
The contract type only indicates how the cost will be calculated not how easy the change is to get approved under either contract type Saving Changes...
Sachin DhaygudeFreelance trainer and consultant| www.scrumfusion.comPune, Maharashtra, India
Hi Julie,
Thanks for your comments. Following are my thoughts.
As you have mentioned, a sound change management or change control procedure is needed to ensure that any legitimate change to project and product scope is accepted only with legitimate adjustment to time, cost and resources. And this is needed irrespective of contract type.
However, fixed price contracts are preferred when scope is clearly known and therefore seller is expected to commit to a fixed price. In this contract type the "cost risk" is transferred by the buyer to seller. And therefore, "change to scope" tends to become arguable and hence rigid. FP contracts never say that change can't happen. But in reality it tends to be more rigid (for obvious reasons).
Whereas cost reimbursable or T&M contract is meant for a situation when scope of work is not exactly known. Or these are meant for variable scope (unlike FP)! So it's important to choose appropriate contract type.
@Bernard - In my opinion, "scope of a project" includes not just the deliverable (product scope), but also work required to accomplish those deliverable. So, even if the deliverable is known but work involved is uncertain (e.g. "bleeding edge" technology) - it's still unclear "project scope".
Trust and trustworthiness between the parties involved is the fundamental need for any contract type. Saving Changes...
