Frustrated by choice between T&M and fixed price?
Choosing between the following is no choice:
- service provider AND customer for contracting delivery risk;
- fixed scope AND flexible scope in a contract;
- committed project plan AND best efforts commitment; and
- competitive on scope AND competitive on resourcing.
Choosing between Time and Material or Fixed Price forces these sub-optimal decisions.
Traditional contracting is combative
Looking at the frame for traditional contracting, it is combative & defensive. Some purchasers look to power and control to meet their interests, Service providers use superior knowledge and key defense strategies (including contingency and tightly specified proposals) to even the playing field... and sometimes take advantage.
This is like two football teams playing a critical game. They want to give the crowd a night to remember. However each team has its own agenda and is playing the game to win. Below are a couple of examples of unaligned interests:
- Customer uses their power to drive the service provider price down without taking accountability for a process improvement they promised. Lower service provider margin led to deteriorating service.
- Service provider wanted a clear advantage by offering fixed fee in a non-competitive environment. The result is the customer has no way to determine if price is reasonable and competitive. The customer agreed believing in their power to “negotiate” their way to the right price. The result no business was performed.
- Due to very high levels of unknowns, the fixed fee contract was thrown out. The service provider had contributed to this problem. Then, they proceeded to take full advantage of a T&M contract. They took no responsibility for their contribution to the original issue.
My list of key requirements for the right relationship
- Joint accountability: for overall performance with individual accountabilities. The service provider (SP) is under the same pressure to complete on time within budget as the customer. i.e. if customer has to pay more for the committed scope and the service provider needs to feel the same pain. AND if customer pay less for committed scope, then service provider increases their profit margin;
- Agility - to be able to introduce learnings as part of the project journey, while also having hard delivery commitments for that journey. For example using a narrow build test to inform the design and the rest of the project. Then make joint commitment to deliver the revised scope;
- Dependable plans - to have planning predictability from joint commitments. i.e. for project scope. Also to have short-term operational high predictability for smaller batches of work; and
value - to have competitive pressure on pricing for project scope and resources.
Traditional contracting is not working today. We are trending towards more collaborative model for achieving joint goals through agile and lean methods. Let's do that for the way we contract.