In Episode 47 of Razorleaf’s Stay Sharp podcast, Navigating Pricing Models for Technical Projects, co-hosts Jen Ferello and Jonathan Scott are again joined by Razorleaf’s first employee, the VP of Business Development, Derek Neiding. In a change from the podcast’s more typical technical topics, the trio digs into the business side of digital transformation, focusing on pricing models for different types of technical services projects, as well as their advantages and challenges—for both customer and provider.
FFP and T&M
The two most common categories of pricing models are fixed price, also sometimes firm-fixed-price or FFP, and time and materials (T&M). Derek describes FFP contracts: “The scope has been defined and the price to deliver that scope is defined as well. There’s not a lot of variability in either scope or price. Should the scope change, that would be a change order that would likely affect the price.”
In contrast, T&M, or sometimes T&E for time and expenses, contracts are “more like an hourly contract,” he says. “There’s still scope, but often the scope is maybe a little bit looser or TBD, and the service provider is going to provide their resources to execute against that scope. At some interval, they will invoice the client for actual time consumed and then any expenses involved in the execution of the scope.” Jen offers an analogy of homeownership, saying, “A home builder, that’s pretty firm-fixed-price. Whereas remodeling might be a little bit more time and materials.”
Which Pricing Model to Choose and When
Jen suggests that the primary advantage of FFP contracts is predictability, and Derek agrees that’s why most prospects and clients would lean toward them. He says, “They want to be able for budget purposes to know how much this effort is going to cost them. They’re worried about scope creep and budget creep.” Of course, the challenge with fixed-price is in defining the scope, because that’s got to be thorough and correct up front for the benefit of both sides of the relationship. Jen summarizes the pros and cons of fixed-price as “When your project scope is well defined, the risk of changes is low, and cost certainty is really a priority or the priority. It’s best for projects that have clear deliverables and shorter timelines. And it’s really incumbent on both parties to agree on the requirements and the scope upfront.”
T&M contracts, on the other hand, are less about predictability and a minutely defined scope. While there’s still some expectation of scope, T&M offers more flexibility. Derek says, “Maybe there are major events and major milestones within the project that are fairly well defined, but there’s a lot in between that’s not defined. We don’t know exactly timing, we don’t know exactly resources, exactly effort.” Jonathan points out that T&M will always be better in situations where customer and provider are working through problems and solutions together.
And Jen adds, “It’s probably a more complex project, longer-term. Time and materials is better for open-ended projects where flexibility and adaptability are crucial.”
The Bottom Line: It’s About Sharing Risk
Jen, Jonathan, and Derek discuss the idea that which pricing model is chosen comes down to how the customer wants to handle risk. And to how it will be shared between the customer and provider. As Jonathan says, “Everything in these two different types of agreements comes down to risk, how you share risk across the two organizations. I’ll risk giving you more profit and paying more for the project if you’ll make sure it gets done no matter what. On that budget. Or the reverse—I’ll take the risk of the project running long and spending more money, but I may save more if I can do it faster, with fewer requirements, whatever it might be.”
Jen notes that partnership is also critical when evaluating your potential risk with a services contract, and she references previous discussions she and Jonathan have had (Episode 24 and Episode 28) about the importance of choosing a good partner for your digital transformation journey. Jonathan adds that the openness of communication is also critical, saying, “If you can have an open conversation about risk … you’re both going into that relationship eyes-wide-open about what’s important to each other, and you can work through what matters.”
Learn More About Services Pricing Models
The full podcast episode offers many more details including alternative and hybrid pricing models you might encounter or consider, which pricing model to avoid if you want to maximize a provider’s problem-solving expertise, why you might consider a discovery project in order to test a relationship with a potential partner, and more.
Check out the full conversation in Stay Sharp Episode 47: Navigating Pricing Models for Technical Projects, and join us each week for a new podcast.
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