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Time and Material Projects are Not Always a Safe Business

There is a general thinking that Time and Material projects are a safe business. Many matured organizations know already that it is not so simple for both Supplier and Customer. Let’s talk about what could go wrong specifically for a Supplier.

What is a T&M project?

If we take that we talk about commercial projects (and we do talk that) from a Customer perspective Time and Material projects are not a safe business. But they may have some other qualities which in specific situation matters much more. But this is the topic for another episode.

Let’s take Supplier’s perspective. Time and Material is just a billing method. In fact, it does not define how risky it is at all, with exception of cash flow risk. 

We all know two types of Time and Material projects which have completely different risk flavors.

The first one is the so-called "With Deliverables" and the second is "Man Pool”.

Time and Material project “With Deliverables” is riskier. The only risk it mitigates is cash flow risk as we bill with time progress and spend the cost. And obviously, we do have a responsibility to deliver and obtain acceptance. And most likely we operate on naked rates without risk budgets (unless the paying party agrees to fund the risk budget).

Man Pool – this one is a more interesting case for Supplier. We don’t have an obligation to deliver deliverables (at least contractually) and all we do is to provide skills and capacity to the customer. But can we say this is a risk-free business?

 

Most Common Risks for Man Pool

In principle longer and bigger engagement, the riskier it is. So what are the common risks for Man Pool projects?

Some, but not all, are presented below.

Resources Change Cost Rate – if we have longer engagement the chances, we will have to change personnel on ‘the flight’ is bigger. People change projects, management changespriorities for people on projects, people simply leave, and so on… 

Need we replace people, not always we can fit a similar cost rate as originally planned.

Resources Change Rump up – if we have to change personnel on a project the new person has to rump up. This could mean some handover time. Customers are not always willing to cover this.

Resources Change Unexpected Expenses – for some longer and bigger engagement international resources could be engaged. Any change on those could mean unexpected expenses. One of the examples is resources planned offshore have to move on site. This drives a lot of additional costs.

Some costs are not visible at the beginning. A classic example of uncovered and difficult to assess is personal tax cost if an ex-pat is working not in a home country. This cost can hit a project long after it is finished. Mostly after the fiscal year.

Hidden Project Management - this example happens not so rare one can think. Some projects sold as Time and Material Man Pool are not discussed enough with the customer how they are going to be managed in real. Both sides (supplier and customer) expect the other side will do.

Legally statement of work does not make the supplier responsible for this. But to make a customer happy quite often some project management is happening on supplier’s cost. Also, quite frequently project management delivered this way is not very effective.

Above is just a few examples of risks that may impact Man Pool projects. In fact, any projects.

 

Why We Should Care and What Can We Do

So, Yes Time and Material Man Pool projects can have risk. The reality is many of them are not financially successful. But this can be managed. Risk should be acknowledged, defined, and quantified at the pricing phase.

 


Time and Material Man Pool projects can have risk. Many of them are not financially successful.”


 

Some risks like hidden project management can be managed upfront, by discussing with a customer and addressing them clearly in the Statement of Work.

But not all can. The risk which cannot be managed at the planning and contracting stage has to be planned financially.

Someone can say well but, if I provide Mann Pool of resources on agreed rate card to a customer, does it make sense to define risk budget as I cannot make it part of the price? Why should I bother?

First, if we know what risk we may have we can try to share a risk budget with a customer. It May not work every time, but worth considering.

Secondly, for the project manager not only the customer is a sponsor but also the management of his own company. Projects, engagements have to be managed for customers and for an internal sponsor at the same time.

To keep the quality of management, the project's financial view should include potential risks. Internal sponsors want to be informed on the worst case they can expect financially from projects and see them managed.

 

Conclusions

Time and Material projects even those called Man Pool can and in most cases do have a risk. It should be managed. The risk, which cannot be managed at the planning - contracting phase, should be planned financially, even if it cannot drive the price.

We project managers should not be afraid to plan risk budgets on those types of projects. Modern pricing/quote tools allow us to plan and include adequate risk budgets into cost and price if we want it.

 

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Marek Rudnicki

With over 25 years of experience in new technology solution innovative companies, specialized in professional services and business consulting. Working for different industries like banking, insurance, telecom, e commers, manufacturing with vast delivery of data analytics solution. The key experience is consulting and delivery - from presale into program management and project portfolio management and practice/portfolio governance. Most of career working on management position within multinational environment, managing team and in very distributed model organization.
Working with individuals from New Zealand to United States and all in between

Note and Disclaimer: The author of this Blog post is Marek Rudnicki. He is the guest author of PMI.hu. The writing reflects the author's own professional opinion, findings, and conclusions, which do not necessarily agree with the position of PMI Budapest, Hungarian Chapter, and cannot be considered as an official recommendation, resolution, or opinion of PMI Budapest. The copyright and publication rights of the writing belong to the original author.

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