Fixed-Price Versus Time-and-Materials Consulting Contracts: Be Sure You Know What You're Getting Into

by Nathan O. Sokal

Editor's Note: This is Part II in a series of articles related to consulting practices. Part I | Part II | Part III | Part IV

In the traditional workplace, paychecks are almost always guaranteed; sometimes they're even taken for granted. In the consulting world, however, it’s not always so simple.

How Do You Bid Them? Let Me Count the Ways

Sometimes getting consulting agreements and project and pricing terms in place can pose a significant challenge. Generally, consultants can bid jobs in two — sometimes three — ways:

• Some provide fixed-price proposals. These arrangements bind consultants to the price they quote, often regardless of whether or not the scope of work changes.

• Others work on a time-and-materials basis, which offers a little more flexibility, especially on projects that aren’t well defined at the outset.

• Still others can arrange a two-phase agreement, which allows them to do and get paid for initial work that will help define the project better and then follow that up with a more accurate, second-phase fixed-price, or time-and-materials effort.

Can You Survive the Fixed-Price Gamble?

It’s all right to submit a fixed-price proposal if you know:

• The job is well-defined
• The goals are achievable
• Exactly what must be done and how long it will take

If you don’t know these things, try hard to negotiate a time-and-materials agreement instead. Clients tend to give their most difficult and least known jobs to consultants.  These factors often lend themselves to less clearly defined project requirements, usually because no one knows enough about the project to be able to define clearly what needs to be done.

Often times, clients that insist strongly on a fixed-price agreement are aware of how difficult the job is and that the specifications are not yet complete. They could be trying to secure a rock-bottom price. Be careful.

If fixed-price is the only way to go, and you feel comfortable enough with the arrangement, just be sure to include a provision in your agreement that allows for modifications to be made to the price as the statement of work or project specifications change.

Sometimes the Safe Path is Through the Middle

Clients sometimes worry about time-and-materials arrangements, especially when they are working with new consultants. Some perceive these agreements as giving consultants carte blanche to spend their money without limit, with no assurance that they’ll get any useful results for their investment. One reasonable way to minimize the risks and serve the interests of both client and consultant is agreeing to a two-phase project arrangement.

Especially for jobs that are loaded with unknowns, propose a paid Phase I (fixed-price, if necessary), in which you will develop a good specification and a preliminary design to meet the specification. After completing Phase I, you will be closer to having the knowledge you need to develop and submit a more accurate fixed-price or time-and-materials proposal for the rest of the project.

Of Course, Always Get It In Writing

Regardless of the arrangement you and your new client choose, make sure your agreement is in writing and signed, and that you have included enough flexibility wherever possible to accommodate project modifications. Then, have fun with the new challenge!

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Nathan O. Sokal is president of Design Automation, Inc., an engineering consulting business. Mr. Sokal has been a consultant for 36 years.