Three main models, each with trade-offs.
1. Time and Materials (T&M):
- Vendor charges hourly / daily.
- Scope flexible. Client controls direction.
- Risk borne by client. They pay regardless of outcome.
- Use when: scope uncertain, requirements evolving, innovation projects, small / agile work.
2. Fixed Price:
- Vendor commits to deliver agreed scope for agreed price.
- Risk shifts to vendor. Overrun is their problem.
- Scope is fixed. Changes require formal change orders.
- Use when: scope well-defined, requirements stable, predictable budget needed by client.
3. Outcome-Based / Value-Based:
- Vendor's fee tied to business outcomes.
- Example: "Reduce case resolution time by 25%; vendor receives bonus."
- Risk shared. Vendor invested in success.
- Use when: outcomes are measurable, both parties trust each other, mature engagement.
4. Managed Services:
- Ongoing operational support post-implementation.
- Subscription model: monthly retainer for X hours / capabilities.
- Use when: client lacks internal team, ongoing maintenance valuable.
5. Staff Augmentation:
- Vendor provides skilled people; client manages.
- Hourly billing for specific roles (architect, developer, admin).
- Use when: client has good leadership but lacks specific skills.
Hybrid models:
- Fixed-price phase 1 + T&M phase 2 — predictability for known work; flexibility for evolving needs.
- T&M with capped budget — flexibility but client-side risk control.
- Fixed-price + outcome bonus — base price + incentive for results.
Decision factors:
- Scope clarity — fixed price requires clear scope.
- Client risk tolerance — risk-averse clients prefer fixed.
- Trust between parties — outcome-based requires high trust.
- Engagement duration — short -> fixed; long -> T&M or managed.
- Client's internal capabilities — strong PM -> T&M; weak -> fixed.
Senior consultant insight: match the model to the work. Forcing fixed-price on innovation work creates conflict. Forcing T&M on simple work causes scope creep.
Increasingly common: multi-model engagements — fixed-price for the implementation, T&M for change requests, managed services for ongoing support.