Technology Negotiation

IT Negotiation Strategies: Controlling costs and timelines through fixed-price contracts

Part two of a two-part series on T&M versus fixed-price IT contracts, from IT negotiation specialist Phil Downe

Author: Phil Downe

TORONTO, May 22, 2018 – When we last talked about professional services negotiations for IT contracts, we were focused on how Canadian accountants — particularly CFOs, CTOs and controllers — can negotiate discounted hourly rates and tie those rates to specific experience levels. Now we’re getting to the tricky part, negotiating in some controls over your costs and timelines, in moving from time and materials (T&M) to fixed price IT contracts. 

First, ask the proponent to provide an implementation plan for the proposed solution. The plan should be broken down into the appropriate phases and tasks within each phase. Each task may have one or more subject matter expert (SME) resources. You might also ask them to schedule the customer resources; who and when they are required and for what duration. 

The ultimate goal is to clearly identify who is doing what work and when — then only pay when that scheduled work is complete and delivered, as “milestone payments.” In an over-simplified example, after vetting each task within each phase, the PS hours summary (proponent only) might look something like this:  

 

     HOURS/ROLE

Week 1

Week 2

Week 3

Total

Product PS Manager

14

16

24

54

Senior Product Specialist

20

20

10

50

Junior Product Specialist 

26

30

20

76

Trainer

20

0

0

20

 

 

 

Total:

200

 

You already have the discounted hourly rates per SME role (see previous blog post) so the rest is simple math. This would be your proposed milestone payment schedule:

 

     COSTS / WEEK

Week 1

Week 2

Week 3

Total

Product PS Manager

$2,800

$3,200

$4,800

$10,800

Senior Product Specialist

$3,600

$3,600

$1,800

$9,000

Junior Product Specialist 

$3,120

$3,600

$2,400

$9,120

Trainer

 

$3,200

$0

$0

$3,200

 

Total:

$12,720

$10,400

$9,000

$32,120

 

20%
Hold Back:

-$2,544

-$2,080

-$1,800

-$6,424

 

At the end of the first period (Week 1) the milestone isn’t the date, but the “delivery” of the work that was scheduled to be completed for that period. Often there is a user acceptance test (UAT) performed to ensure the deliverable meets the specification and does what it is supposed to do.

An additional benefit with this kind of detail is the ability to shift the tasks around. If you were to lose interest in some portion of the solution functionality you know exactly how much time was allocated to it and how much to reduce the project hours by. Move a task from Phase 1 to Phase 2 and the allocation and costs move with it.  

Your leverage when deliverables go un-delivered

Once the deliverable is accepted by the customer then the payment goes out, less 20 per cent or some other reasonable hold-back. This hold-back is leverage. Even after everything is delivered at the end of Week 3 in our example, you still need the documentation; the leverage of the hold-back ensures you get it all in a timely manner.

I don’t want to get too far down in the weeds on how to negotiate this, because they can argue their position in several ways. Most likely they will protest and insist that, as a T&M project, you pay as the hours are logged. The obvious retort is what if the deliverable is low quality? What incentive do they have to perform their obligations with professional SMEs in an expedient manner? Aren’t some form of trust-mechanisms warranted?

What if the UAT fails miserably? Then what? The customer has wasted a few days testing the modules and finding it full of bugs.

If there are no consequences, then the PS firm could just skip the quality control and hand over a boilerplate “good-enough” configuration, and have the customer do all the work documenting the problems. If the customer claims missing functionality that wasn’t on the original stated requirements, it could trigger a billable Change Order (CR) request. 

Should you be paying top dollar for shoddy work? I’d prefer to see any repair work after a failed UAT done free of charge or at least at a discounted hourly rate. That is a compelling incentive for the PS Firm to get it “first-time right.”

I once asked a vendor, how much contingency did you build into your PS hourly estimates? (Keep in mind that they might have “low-balled” the estimate in order to win the business.) It would surely have signalled incompetence if he said none, so he answered 20 per cent. I eventually got the contingency held back as a reserve only to be used in the case of billable CRs.

In many situations, especially with common multi-tenant Cloud deals, you can easily negotiate a risky T&M offer into a more predictable, fixed-price deal. But remember to put in the effort on your requirements definition in order to avoid CRs. In my next blog post, we’ll wrap up professional services with a few final thoughts.

Interested in a free negotiation strategy webinar with negotiation specialist Phil Downe? Email editor@canadian-accountant.com and we will add you to our notification list.

Phil Downe is an independent IT negotiations specialist and principle with Relations Management Group Inc. based in Toronto. He can be reached at 416-804-7445 or Phil.Downe@ITnegotiations.com.

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