Why Facebook Wants To Be Regulated?
The recent Cambridge Analytica scandal has ended up putting companies like Facebook in hot water. The common man has now become aware of the fact that companies like Facebook have access to a lot of personal data. They have also become aware of the possibility that Facebook could use let third parties access some of […]
Growth and Evolution of Organizations
It is very interesting to study how Organizations and Businesses grow, evolve, change, mature and also decline over a period of time. Organizations are very similar to living entities that respond, react and evolve in relation to the external and internal environment that surrounds them. The survival and growth is entirely dependent upon the continuous […]
Disaster Recovery and Business Continuity Planning Concepts
In the business world today, every customer expects Organizations to walk the talk. Being sensitive to customer expectations and to ensure that the business operations are not hampered due to any reason, organizations have begun to take the concepts of Disaster Recovery and Business Continuity plans seriously. The concept of Disaster recovery is of prime […]
The Mouse Charmers: A Case Study of the Indian Information Technology Industry
From Snake Charmers to Mouse Charmers: The Changing Perceptions about Indian IT It would not be an exaggeration to say that India is an IT (Information Technology) powerhouse. Indeed, the Indian IT Industry is globally recognized for its ability to get quality work done at competitive rates and for its efficiency in churning out Millions […]
The World of Private Equity
The term “private equity” evokes many emotional reactions. Many investors have made a lot of money thanks to the strategies being followed by private equity companies. However, many companies no longer exist because of these private equity funds. The investments being made by these funds is rapidly growing. Private equity funds have a lot of […]
Time and material billing refers to the billing process wherein actual number of hours worked and the resources deployed are billed on an as is basis with the margin added to it.
In other words, time and material billing refers to the billing that is done as per the actual number of hours/days/months worked by the resources (how many ever) and multiplying the two to arrive at the consolidated figure.
Time and material billing is very popular in the software industry as schedules are often difficult to manage and hence, project managers bill the clients for actual work rather than estimated work.
Further, time and material billing has the advantage of taking into account project overruns, which means that even when the project shoots past the estimated deadline, the vendor is covered because of the actual billing that takes place. On the other hand, the clients in recent times have been reluctant to go in for a time and material actual costs billing because of the risks involved in terms of budget overhangs and delays.
In other words, time and material billing can lead to cost overruns and associated problems.
On the other hand, fixed cost billing introduces an element of discipline both for the vendor and for the client as the billing is done based on estimation of costs and a margin that is added by the vendor.
In recent years, the software industry has moved into the fixed cost mode because of the fact that project overruns and delays have become common and the clients do not want to suffer for the vendor’s mistakes.
Of course, the delays can be from the client side as well and this is the reason why many contracts explicitly specify the penalty clauses and other fine print details so that both the vendor and the client are protected.
Fixed cost billing ensures that the vendor has a cushion against cost overruns as well as ensuring that the vendor has an incentive to deliver on time. Further, fixed cost billing also ensures that the clients cannot get away with delays because the vendor can invoke the penalty clause. It is for these reasons that fixed cost billing has become very popular in recent years.
This is not to say that time and material billing is redundant or not being used. On the other hand, time and material billing is very important when multinationals have their subsidiaries in overseas locations as cost centers. These cost centers are setup with the express purpose of providing services to the multinationals and are not expected to be profit oriented.
In other words, they are known as cost centers because they need to show that they have accounted for their costs and have returned some profit to the headquarters.
The fixed cost billing is preferable when both the client and the vendor are entering into a relationship for the first time and where each has to apprise and evaluate each other for genuineness and adherence to the terms of the contract.
Further, defense contractors in the United States are now operating under fixed cost billing because of complaints and public outcry over cost plus billing which is a variant of time and material billing. In cost plus billing, the vendor recovers the entire actual cost along with a profit and this method has come in for severe criticism in recent years. This is the reason why across the world, fixed cost billing is emerging as the favorite method of billing.
Whichever method of billing one prefers, the key aspect is that the terms of the contract must be adhered to and therefore, there must be an occasion where either side invokes the penalty clause or sues the other side for breach of contract. This is the bottom line requirement that should govern the execution of any contract.
Your email address will not be published. Required fields are marked *
Costs in Project Management – Costs associated with the Projects
February 12, 2025
