Managing Time and Materials Contracts

Time and ExpensesTime and materials contracts are frequently used for staff augmentation, when an organization needs labor types that they don’t have on staff, in order to complete some project or task. Generally, these contracts are based on an imprecise statement of work, with relatively few specific deliverables. Cost is calculated from an estimated number of hours at the specified price per hour for each labor type, with some estimate for expenses, to be passed along without markup. The schedule is usually not very detailed, although there is almost always an “end” date in there somewhere. In short, it’s a vehicle for quickly getting contingent workers on board, rather than a plan. And as a project manager, whether you are managing that labor or supplying it, there are some things you need to consider.

Find the Flexible Dimension

Consider the three fundamental dimensions of the project: scope, cost, and schedule. Of the three, which is the most important? Before you start work under such a contract, try to rank-order them. In some cases, there is an unmovable date that must be met, and every other consideration is secondary. For example: replacing an old financial accounting system so that it goes into operation on the first day of a fiscal year. In other cases, there is no “minimum viable product,” and the contract will provide the specialty skills required to deliver key elements of the required scope. In still other cases, the business case is very cost-sensitive. Understand which of these dimensions is least flexible in order to understand your options for the other two.

Define Quality

If you were contracting with someone to excavate, build forms, place rebar, and pour concrete for the foundation of a building, there would be extensive specifications, plans, drawings, quality standards, and so on. There would be no doubt what “good enough” and “done” looked like. Under a T&M contract, the deliverables are labor hours, rather than tangible products. Consequently, quality must be specified at the task level. For example: if you request a training plan to prepare some group of workers to use a new process, specify that you want a draft plan, so that it can be reviewed and specific changes requested. Otherwise, your specialized labor might end up doing commodity labor editing, which is not very cost-efficient. Similarly, if you get a contract programmer to create some custom process, consider whether every possible condition must be automated. It might be more cost effective to have the corner cases and once-a-year events handled manually.

Manage the Expenses

In a typical staff augmentation contract, travel expenses are part of the “materials.” I’ve seen contracts where the travel estimate was as much as 25% of the labor estimate. But, the 90’s are over; consider the possibility for some of the work to be completed off-site. Why incur travel costs in order to have someone sit down the hall in a cube, huddled over a laptop, for forty hours a week? We have collaboration tools that allow us to manage projects with a globally distributed team, from conference calls and Webex to document sharing tools like SharePoint and Central Desktop. Also, it’s common these days for very specialized knowledge workers to be on several projects at once, billing a few hours each week to each of them. Why pay for a “work week” of travel in order to get a “work day” of labor? And if you are the vendor, why lose all of that high-value productivity in travel time?

Under a T&M contract, the customer retains most of the risk. It’s not uncommon for contingent labor costs to expand to the point where it makes the overall project a failure. The sponsor expects the project manager to understand and manage that contract, as a source of labor as well as an expense. The key is to understand the cost drivers of that contingent labor, and keep them under control.

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About Dave Gordon

Dave Gordon is a project manager with over twenty five years of experience in implementing human capital management and payroll systems, including SaaS solutions like Workday and premises-based ERP solutions like PeopleSoft and ADP Enterprise. He has an MS in IT with a concentration in project management, and a BS in Business. In addition to his articles and blog posts, he curates a weekly roundup of articles on project management, and he has authored or contributed to several books on project management.