How Does the Time and Materials Contract Work, and Why Do We Use It at Rigby?

By Karolina Jakubowicz

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Choosing the Right Client Collaboration Model - Key to Success!

In the business world, especially in the IT industry, contracting services and projects is an everyday reality. Companies and clients must select the appropriate collaboration model to ensure the effective and efficient implementation of a project. One of the most popular contract models is Time and Materials (T&M). In this article, you will learn what a T&M contract is, when it is worth using it, and how this contract model compares to others.

What Is a Time and Materials Contract?

A Time and Materials contract, also known as T&M, is an agreement model that allows flexible billing for work and used resources. This agreement is based on the assumption that the contractor bills the client for actual working hours and consumed resources, such as tools, equipment, or licenses. Hourly rates are pre-negotiated between the parties, which allows for clear cost determination.

Such contracts are usually used when the quantity and scope of work are difficult to define or when it is expected that project requirements will change during its execution. The advantage of this model lies in its flexibility and the ability to easily adapt to changing requirements.

Establishing a Time and Materials Contract

You already know that in the case of Time and Materials contracts, the client pays the contractor for actual working hours and used resources. However, to effectively implement this billing model, there are several key steps to follow.

Determining Hourly Rates

The first step is to determine hourly rates for various specialists who will be working on the project. These rates may vary depending on the level of experience, specialization, or region.

Key Project Assumptions

To avoid excessive costs and unnecessary delays, it is important to define the most critical business assumptions at the beginning of the project. This will help avoid misunderstandings and ensure clarity in its execution. Of course, during the contract, your needs and ideas may change. This type of billing model assumes flexibility in response to changing requirements.

For these reasons, at the beginning of client collaboration discussions, we create an MVP (Minimum Viable Product). We plan only the features that are absolutely essential for the basic functioning of the application. This allows for a quick release of the initial product version, on which users can start working and providing feedback. By creating an MVP as part of a T&M-based project, we avoid unnecessary time and resource wastage.

Advantages and Disadvantages of Time and Materials Contracts

Time and Materials contracts have their unique advantages and limitations that should be considered before choosing them.

Advantages:

  • Project Flexibility: One of the main advantages of Time and Materials contracts, as mentioned earlier, is project flexibility. In the case of projects with an undefined scope or frequent requirement changes, T&M allows for adaptation to new challenges and rapid response to changes.

  • High Product Quality: In the T&M billing model, developers can focus on creating a high-quality product because they do not have to worry about time constraints resulting from a fixed price assumption or rigid project completion timelines.

  • Real-time Updates: Clients are regularly informed about the progress of work and can immediately influence priorities or changes, which enhances their control over the project.

  • Cost Savings: By working on a time-based billing model, you achieve the lowest possible cost. A T&M contract allows you to shorten the project's duration at a time of your choosing. If you want to release a project without implementing all the improvements but believe it is sufficiently refined at this stage, you can do so. This will save you a lot of money and give you time to consider the next steps in your project's development.

Disadvantages:

  • Lack of Precise Costs: One of the biggest challenges of a T&M contract is the lack of precise knowledge about how much the project will cost. This can be problematic, especially when the client's budget is limited. Establish an action plan and set priorities to let the project contractor know what matters most and adjust accordingly to the work mode.

The solution to this problem is ballpark estimation. It helps both the client and the contractor understand whether they have realistic expectations regarding the project. If the client has a certain budget, ballpark estimation allows them to see if what they want to achieve fits within the available cost. The contractor can determine if they can complete the project within the expected budget and time frame. This helps avoid misunderstandings and disappointments in the future.

  • Keeping a Finger on the Pulse: If you do not work closely with the contractor, you may lose control of the project. You must be watchful and engaged in the project's implementation to monitor your expenses, progress, and completion time effectively.

When Is It Worth Using a T&M Contract?

A Time and Materials contract is particularly beneficial in specific situations:

  • Project Specifics: When a project is creative, developmental, or related to IT, it can be challenging to precisely define the scope and objectives. In such projects, it is difficult to predict all stages and challenges, which is why the flexibility of this contract form allows for adaptation to changing needs.

  • Urgent Projects: In the case of urgent projects where rapid implementation of a solution is crucial, a T&M contract allows for an immediate project start and the shortest possible completion time.

  • Projects with Uncertain Requirements: When the client's requirements are not fully specified, T&M allows for gradual refinement during the project's execution.

  • Collaboration with New Clients: When establishing a collaboration with a new client and you do not have a complete understanding of their needs and preferences, a T&M contract allows for building trust and a better understanding of common expectations during the collaboration.

  • Seasonal Projects: For projects subject to seasonal demand fluctuations, T&M can be a favorable solution. The provider can adjust resources to the client's current needs, avoiding excessive costs during periods of lower demand.

  • Further Project Development: A project based on a T&M contract can smoothly evolve because adding new functionalities that were not initially planned is straightforward. There is no need to make changes to the agreement or argue about something that was not in the original assumptions. Flexibility is fundamental in this collaboration model.

Comparing T&M Contracts with Other Billing Models

Time and Materials contracts are not the only billing model, but they are the best choice for IT projects and online stores. It is worth comparing them with other popular models.

Fixed-Price Contract

In a fixed-price contract, a single, strictly defined price is established for the entire project. This model is suitable when the scope and requirements of the project are precisely known and will not change. However, eCommerce projects stand out with many changes, testing, and, therefore, this model is less suited for clients in this area.

Time-Boxed Contract

In a time-boxed contract, a specific time frame is set for project completion, and the execution team is given freedom to create the product within that time. IT projects are characterized by the possibility of completion in a shorter time than planned, reducing project costs. Therefore, this billing model is not well-suited for IT projects.

Outcome-Based Contract

Outcome-based contracts are suitable when expected goals and outcomes are clear and predefined, and the risk of requirement changes is minimal. Nevertheless, in the IT and web development industry, where flexibility and responsiveness to changes are crucial, T&M contracts may better suit the reality of projects. Therefore, this model is rarely used in software house projects.

Tips for Time and Materials Contract Clients in a Nutshell

Key elements to consider:

  • Specification: The specification is essential, but it should be determined just before the task's implementation. If established at the beginning of project discussions, assumptions can change many times as the project progresses.

  • Clear Communication: Build trust through clear and regular communication between the parties involved.

  • Rate Setting: Define competitive hourly rates that take into account the experience level and specialization of employees.

  • Monitoring Work Hours: Regularly monitor the team's working hours to avoid excessive costs.

  • Change Management: Effectively respond to changes in requirements while maintaining project flexibility.

The Time and Materials contract is a flexible agreement model that allows for billing based on actual working hours and resources used. Its advantages, such as project flexibility, high product quality, and trust building between parties, make it a popular choice in the IT industry. However, the key to successful implementation of a T&M contract lies in accurately defining task specifications and clear communication between the client and the contractor. This will ensure the successful execution of the project.

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Grzegorz Tomaka

Co-CEO & Co-founder

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Jakub Zbaski

Co-CEO & Co-founder

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