Fixed Price or Time & Materials (T&M) in IT outsourcing companies

If you’re already familiar, read no further. For all others, I hope it brings some clarity and peace. I noticed most people working for years in these companies don’t have the below understanding and it sometimes leads to frustration instead of action.

𝟏. 𝐅𝐢𝐱𝐞𝐝 𝐏𝐫𝐢𝐜𝐞
A type of contract where the IT company invoices the client for a fix sum of money. Either lump sum, either monthly/quarterly recurring, either in tranches upon reaching certain milestones/deliverables.

So once the company committed to deliver something, it cannot ask the client for more money regardless of the effort spent to deliver what was promised or any costly issues that may arise. This is the least preferred type of engagement, in my experience, especially in complex environments (see Scrum Guide).

𝟐. 𝐓𝐢𝐦𝐞 & 𝐌𝐚𝐭𝐞𝐫𝐢𝐚𝐥𝐬 (𝐓&𝐌)
The IT company invoices the client, typically on a monthly basis, based on time worked by the people in the team, plus other rechargeable expenses (travel, accommodation, specific equipment etc.).

This is why you are being asked with insistence to always submit your timesheets and expenses reports on time and accurately, because invoicing has to be done before the closing of that financial month.

There is a Rate Card in the contract stating how much each role costs the client e.g. per working day. Fictional example:

Developer – 300 EUR
Senior Developer – 420 EUR
Architect – 600 EUR
Tester – 280 EUR
Senior Tester – 380 EUR
Senior Automation Tester – 500 EUR
Business Analyst – 200 EUR

So, if you are a Developer and worked 21 days in March, the line item on the invoice the client receives referring to your work on the invoice is:

Jane Doe – Developer – 21 days @ 300 EUR/day — > 6,300 EUR

The total of these line items for you and your project colleagues (Time), plus other expenses if applicable (Materials), is the total cost of the invoice your client will pay to your company for that month.

𝐎𝐯𝐞𝐫𝐬𝐢𝐦𝐩𝐥𝐢𝐟𝐢𝐞𝐝, 𝐭𝐡𝐢𝐬 𝐢𝐬 𝐡𝐨𝐰 𝐲𝐨𝐮𝐫 𝐜𝐨𝐦𝐩𝐚𝐧𝐲 𝐦𝐚𝐤𝐞𝐬 𝐦𝐨𝐧𝐞𝐲. It then pays salaries, equipment, office rent, the free coffee you like to complain about, taxes etc.

What is left is the company’s profit, the main reason it goes through the challenges of existing.

This is why “support” functions (finance, procurement, facility etc.) typically earn less pay. They are not invoiced to the client and are pure cost to the company.

This is why “production” functions (development, testing, project management etc.) typically earn more pay, as they bring more money into the company than they cost the company, by being sold to the client at a profit.

It’s not about “evil capitalism” or who has more intrinsic value as a human being. It’s math.

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 )

Facebook photo

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

Connecting to %s