Usually, work is done at the client organization’s premises. The client project team is responsible for clearly defining the project scope, and overseeing the development process. Hence, it could be correlated that greater the definition of project requirements, the less time is wasted in re-work, so shorter will the project execution be, which implies considerable savings for the client organization. On the other hand, poor definition causes re-work, which in other words leads to increased costs and de-motivation for both, the client and service providers’ employees. Hence, it is pivotal that the project deliverables are continually verified and validated, project continually monitored and controlled for any form of slippages, consistent and clear communication guidelines established, governance and escalation mechanisms put in place. Furthermore, the contract elements need to be clearly defined and agreed upon by all parties.
The service provider and the client organization may agree upon ah hourly, daily, weekly or monthly rate for the project resources. This billing is based on the overall educational levels, skillset and relevant project experience. It is also possible to use a single blend rate i.e. one agreed upon rate for all resources involved in the project. As the blend rate basically levels billing, the service provider may internally use some standard resource allocation model to decompose, determine and map the resources required by the project. It is essential that the service provider communicate the decomposition and resource allocation model to the client organization to help the client understand the skill levels of the resources allotted to the project under its supervision.
For effective project execution using a T&M model, the client organization should put in place strong project management teams and methodologies to monitor and track the project’s progress on dimensions of schedule, scope, cost, quality and productivity. It is also mandatory that the client project teams tightly manage dependencies so that any costly lead or lag times (slack) could be avoided and resources’ idle time could effectively be reduced.
The advantages of T&M model lie with the fact that skilled resources are locked for the entire project duration, so competencies and skills can be built over the time. This model bestows the client organizations with the additional flexibility of progressively adding or reducing head count over time to adjust to the changing project demands. Furthermore, management by metrics (MBM) or management by objectives (MBO) during the different IT development phases provide better insights into the cost structures and returns of using this model.
Time and Materials (T&M) model with a cap
The T&M costing model with a cap is an extension of the T&M model. In this case, an upper limit or cap on the costs is imposed to prevent uncontrolled cost escalations in an outsourced project. It is worthwhile to impose such restraints because it helps to ensure that the project benefits lie within budgeted cost expectations.
Even in case of T&M contract with cap, it is a prudent practice to conduct a pre-award audit of the service provider’s accounting system to ascertain whether system could properly segregate direct and indirect cost from other overhead costs.
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> Read here soon in the next part about the Consumption-based pricing model
About the author: Mithun Sridharan is a General Manager at BlueOS LLC, an advisory based in Germany, where he is res pons ible for driving the s trategic s ales initiatives and managing cus tomer engagements in Digital transformation & Analytics. Prior to BlueOS, he was an Account Manager with Oracle Corporation, where he drove strategic partnerships with key enterprise accounts and major Independent Software Vendors in Europe and the USA. He brings with him over a decade of International experience in Management Consulting, Business development, Strategic Marketing & Product Management. He holds an MBA from ESMT Berlin and a Master of Science (MSc) from Christian Albrechts University of Kiel. He is a Harvard Manage Mentor Leadership Plus graduate, an SAP certified Business Intelligence Professional, a Project Management Professional (PMP) and a Certifed Information Systems Auditor (CISA). He also served as the Communication Chair for the German Outsourcing Association in 2013 and is based in Heidelberg, Germany.
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