if the service requires more time or material than
planned, the supplier's profit is reduced, not yours.
Sometimes, a supplier will refuse such risk and will insist
on using a time and materials contract.
In a time and materials contract, you pay the
supplier for the number of hours actually required to
perform the service.
So, the supplier has no incentive to
minimize the number of hours expended on the service. The
less efficient the supplier is, the more money it makes!
Purchasers often feel that using a time and materials contract
is like issuing a blank check. But it doesn't have to be. You
can negotiate these items to control final pricing :
1.Labour Rate. Suppliers not quoting
fixed prices may charge "list price" for labor. If you are a big
company or are sourcing a big project, don't pay list price.
Negotiate a lower labor rate to reduce your total cost.
2.Maximum Number of Labor Hours.
Experienced suppliers should be able to estimate the hours
needed for a job.
Negotiate a cap on the number of hours where,
if the supplier exceeds that number of hours, you don't pay for
the overage. This avoids the "less efficiency = more money"
issue of time and materials contracts.
3.Mark-Up on Materials. When
billing for a time and materials contract, the supplier usually
materials cost by adding a markup (usually 15 – 35%) onto the
prices it paid. If a supplier paid $1,000 for
materials, it will bill you about $1,200. You can ask the
suppliers to charge only what they paid for materials, with no
4.Not-To-Exceed Total. The next
best thing to a fixed price contract is a time and materials
contract with a "no price escalation" clause. Under this
arrangement, the supplier can charge you for its labor and
materials up to a certain maximum.
If the time and materials costs exceed that maximum,
the supplier charges you the escalated amount and
assumes the excessive costs. This offers incentive for
the supplier to work efficiently and helps you provide
a good estimate for your