Situations where I recommend hourly based time and materials contracts (all criteria must be met)…
The buyer understands:
billings will be highly variable and unpredictable
service provider is incentivized to maximize hours, scope, and duration of the project
staff turnover at service provider can result in buyer paying for replacement training
hours worked are often estimated after the fact and somewhat discretionary
rework hours will slip through
once the “cap” is hit, the cap needs to go up or work stops
The service provider:
has >99.5% timesheet compliance every month (entry and approval)
has automated tools to flag upcoming budget overages
can invoice immediately after the month is over
is willing to only take a portion of contract value into backlog
applies a higher bad debt provision for such contracts
understands revenue and earnings will be heavily impacted by staff turnover
