Compare and contrast a firm fixed-price contract to a time and materials contract. When would each be appropriate for a given project? (Points : 20)
Time-and-materials (T&M) contracts are typically used when the scope is limited or undefined. The contract is open ended, and the buyer pays the seller for its labor (i.e., time) as though it were a cost-plus contract, and its materials as though it was a unit-cost contract. The contractor has little incentive to be efficient. Unfortunately, because there is no defined scope, the cost to the seller can go higher than hoped. Fixed price contracts, also known as a “Flat Price” contract, transfers all price risk and opportunity from the buyer to the seller on the date of the trade. The price is fixed and if the estimated costs were not correct, the seller will take a loss. For the fixed price contract, the scope and schedule need to be well defined and fully understood by the seller to get an accurate price. If the buyer requests any changes, the seller should not accept them without asking for additional funding and/or a schedule extension. The seller must deliver the services/products that were offered before he can quit the project. Time and materials can be a way of reimbursing jobs that aren’t well defined. Most field service contracts are time and material contracts. The incentive for making such a contract is for the buyer to lock in usually discounted labor and materials pricing. The challenge with time and materials is that the buyer not only has to keep its eye on the deliverables, it also has to keep its eye on the seller’s costs.