Read our next blog post for Sourcing and Procurement professionals from Anna Van Cleef about Time and Material contracts and best practices for this strategy.
Time and Material is a widely used contract strategy for Sourcing and Procurement professionals around the world. It allows Buyers to pay Suppliers for the direct materials, hourly rates, subcontracting, and equipment charges necessary for the completion of work. Each contracting strategy comes with its benefits and challenges. This article provides details on these topics for Time and Material contracts as well as tools to overcome obstacles.
Why would you use a Time and Material contracting strategy?
Time and Material contracts allow for more flexibility and are best utilized when:
- the scope of the project is not well defined,
- there is a medium to high probability of requirements changing,
- the project has a longer duration, and
- an engagement requires a change order.
Various types of engagements may require flexibility in scope or timeline. For example, construction work, security, consulting services, and general maintenance activities are all engagements where a Time and Materials contracting strategy might be utilized. This allows for flexible scope and changing requirements throughout the life of the engagement.
In this model, Buyers benefit by only paying for the labor, equipment, and material charges that are associated with the engagement. Suppliers benefit because they are exposed to less risk if the scope of the engagement changes. Because the Supplier has less risk, they limit the “padding” they include in their estimates to account for unforeseen work which can help the Buyer in return.
Time and Material contracts are also particularly useful for longer-duration projects or engagements. Longer engagements can often evolve over time increasing the value of the flexible nature of this contracting strategy.
A Time and Material contracting approach is often utilized when change orders are required for services, regardless of the original contracting strategy. A change order is an amendment to an agreement that resulted from changing requirements, scope, timelines, or underestimated costs. The flexibility for Time and Material makes it particularly useful for change orders when the need arises.
What are the challenges of Time and Material Contracts?
While harnessing the flexibility that Time and Material contracts provide, they are not without their challenges.
Suppliers are not incentivized to perform work efficiently; by paying an hourly rate, the Supplier can find benefit in extending the time to complete the work leading to a need for oversight. Oversight requires internal manpower which could increase internal costs or redirect manpower to providing oversight for engagements. With a lack of data and information related to the work completed, even with oversight, internal resources can end up “pencil whipping” timesheets and invoices. As a result, there is a potential for overpayment and additional work on the backend of the process to recuperate the overpayment.
What can help me manage Time and Material Contracts?
Internal resources having oversight of the work being performed increases the sense of urgency to complete the work for the engagement; however, designated resources cannot be everywhere at the same time. With that in mind, how can the buying organization be confident that what is being paid is in alignment with the Supplier’s work and contract?
One potential option is to leverage a Contractor Management Software, such as Track, which leverages the site’s Proof of Presence solution, or a mobile alternative, to validate that contractor personnel are onsite and automatically applies contractual terms and conditions to the hours worked. This can provide more confidence and data to support charges driving visibility and transparency between the Buyer and Supplier. With the same system managing material and equipment charges, all the contractual costs for services suppliers can be managed in one system. With this type of capability, the Time and Material contract strategy becomes a practical solution that reduces the chances of overpayment while paying the Supplier the accrued costs in a timely manner.
Some companies have gone away from Time and Material contracts altogether in favor of Fixed Fee, or Lump Sum, contracts. While taking this approach can reduce the feeling that oversight is necessary, this contracting strategy has its own benefits and challenges. Look for a future article on Fixed Fee, or Lump Sum, contracts.
