How to Choose Between a Time and Materials Contract and Fixed Price Contract

If you are in the business of service provider, you will be faced with the challenge of choosing the right pricing method for your services in a manner that will help you keep your customer base and at the same time not compromising the profitability of your business. There are two main pricing criteria that most companies embrace depending on the line of work they deal in. There are the time and materials vs fixed price contract. These two methods define the different agreements that a business can enter into with their client to determine how they will relate throughout the work process.

In trying to make a choice about which one suits your business, it is vital that you have a brief understanding of the pros and cons of each of the above methods. Below is a highlight on these exclusive pricing models based on the advantages and disadvantages of each.

To start with, consider the fixed-price contracts. These contracts are best suited for projects that rarely deviate from the initial arrangements and terms of work. These are contracts that have fixed terms that define the full responsibilities of all the parties involved giving no room for non-negotiated adjustments.

This type of contract has a few benefits to point out. Chief amongst them is that it provides a pricing guarantee. With this agreement, there is no room for pricing to change provided that scope of work and responsibilities of the parties involved remain unchanged. This contract is also attractive as it defines all the phases and end dates of each stage of tasks; thereby, there is no room for wayward dealings once work has been commenced.

On the other hand, the main disadvantages of this contract are the client is more likely to part with more money to fund a project based on this type of arrangement as compared to one based on time and material contracts. The contract also consumes time in terms of preparation.

As an alternative to this model of pricing is the time and materials contracts. This is the contract where the client will pay for the services you offer depending on the time-based cost of labor and the cost of buying materials for the project. Apart from giving the client a chance to control their budget and determine the pace of progress of the project this type of contract has the following benefits. Learn more about time and material contract in this site.

The fact that this contract offers a significant level of flexibility means that you will have a chance to compensate for any alterations and under quotations as realized in the course of work. It also provides transparent dealing as one can track the time and expenses used.

However, this pricing model also has its share of drawbacks. The service provider can easily extend the scope of work and render the project more expensive. The service provider may even end up making losses when they focus so much on attaining efficiency that may not be adequately compensated for when calculating time and materials spent in the project. Learn more about time and material conntract management here:

Leave a Reply

Fill in your details below or click an icon to log in: Logo

You are commenting using your account. Log Out /  Change )

Google photo

You are commenting using your Google account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s