T&M, short for Time and Materials, is a common pricing methodology that is used when the project scope is not clearly defined or when the scope frequently changes.
T&M contracts are ideal for small projects or tasks because the client pays for only the actual hours worked and the materials used on the project. This arrangement gives the client the greatest leverage for obtaining services at the lowest possible price.
T&M pricing is quoted based on an hourly, daily, weekly or monthly rate. The service provider’s profit is built into the quoted hourly rate and any materials used during the course of the project. Travel expenses are generally reimbursed at cost.
The client’s cost is determined like this:
(Hours Worked x Hourly Rate) + Materials + Expenses
Advantages to the Client
- Generally less expensive than fixed price or flat rate pricing
- Provides greatest flexibility when the project scope is not clearly defined
- Enables scope changes without the hassle of scope control or change management procedures
- Provides the most control over the project
- Easy to terminate or cancel the project
Disadvantages to the Client
- The client is responsibility for the project scope, all project deliverables, and results
- The client assumes all project risks
- Requires oversight or direct supervision of project activities and schedules
- Lack of scope control enables scope creep
- Requires budget oversight and restraint
Advantages to the Service Provider
- The client is responsible for all project deliverables, that is, the service provider is not responsible for the project scope or the project outcome
- Client assumes all project risks
- The service provider is paid for all materials, expenses, and hours expended on the project
- Profit margin is built into the hourly rate and the sell price of any materials used on the project
- Expenses such as travel and lodging, are reimbursed at cost
Disadvantages to the Service Provider
- The project duration is generally unknown, that is, it may be difficult to determine whether the project will last one day, a week or a month or longer
- Resource scheduling may be challenging