An Overlooked Point? - Contractual Approaches

This Contractual and Payment Models paper discusses the evolving landscape of consultancy and recruitment, emphasising the importance of clear and well-defined Statements of Work (SoWs). Here are the key points senior executives should consider before buying:

Introduction: The consultancy and recruitment industries are increasingly overlapping, leading to a grey area where pseudo deliverables and time and materials (T&M) payment models are common. Historically, T&M was rare in consultancy, used only when project scope was unclear.

Fixed Price, Milestone-Based Approach:

• Pros:

  • Tax Compliance: Your project and the vendor will be owning the tax risks as they are contracted to successfully achieve the projects deliverables, outcome and objective/s.

  • Predictability & Budgeting: Clients know the total cost upfront, making budget management easier.

  • Risk Management: The vendor bears most of the risk, providing cost certainty for the client.

  • Clear Expectations: Agreed-upon deliverables and timelines ensure clarity and trackable progress.

  • Efficiency & Focus: The vendor is incentivised to work efficiently to meet deadlines, budget and your timeline.

  • Less Administrative Overhead: Reduced need for ongoing oversight or tracking of hours worked.

  • Acceptance / Rework: The vendor is contractually on the hook for realising the deliverables to your satisfaction. They will re-work deliverables, at their cost, until you accept.

• Cons:

  • Limited Flexibility: Changes in project scope can be challenging to manage without renegotiating terms. However, a good vendor will afford pragmatism for "light changes" and material changes will always be mutually signed off.

  • Potential for Overestimation: The vendor may overestimate costs to cover potential risks, leading to higher initial quotes.

    
    

Time and Materials (T&M) Approach:

• Pros:

  • Flexibility: Allows for adjustments in project scope and requirements as the project progresses.

  • Transparency: Clients can see exactly where time and resources are being spent.

    
    

• Cons:

  • Uncontrolled Scope Creep: Lack of firm boundaries can lead to spiralling costs and extended timelines.

  • Encourages Inefficiency & Delays: Payment based on time spent rather than results delivered can lead to inefficiencies.

  • Unpredictable & Escalating Costs: Clients are exposed to constant price fluctuations without a clear cost ceiling.

  • Increased Client Burden & Oversight: Clients must continuously monitor progress and track expenses.

  • No Cost or Risk Protection: Financial risk is shifted to the client, with no recourse for mismanagement or delays.

    
    

Risks of Poorly Written SoWs:

• Acceptance: without clearly defined, mutually agreed deliverables you will have a lack of clarity of what is acceptable and what is not, ultimately pay for.

• Lack of Clear Scope: Leads to scope creep and misaligned expectations.

• Increased Legal & Contractual Risks: Vague SoWs may not hold up legally in disputes or any potential external audit.

• Budget & Cost Overruns: Without detailed breakdowns, costs can spiral out of control.

• Poor Resource Allocation: Unclear scope can lead to inefficiency and burnout.

• Weak Risk Management: Poor SoWs often skip risk assessments and mitigation strategies.

• Difficulty in Measuring Success: Without clear, mutually agreed deliverables & concrete KPIs, it's hard to determine project success.

• Relationship Damage: Unmet expectations can damage trust between clients and vendors.

At IVARTY, we recommend a fixed price, milestone-based payment approach to share project risks and ensure clarity. This approach reduces the administrative burden and aligns with your desired outcomes, timelines, and outputs. The choice between fixed price and T&M depends on your project's nature, risk tolerance, and flexibility requirements but a credible Consultancy vendor will be highly experienced in providing clarity and advice during pre-mobilisation so you can adopt a fixed price approach.

Ultimately and obviously, the choice is yours but if you have a clear understanding of what your project is to achieve and are working to a budget then fixed price and or milestone-based approach is the way to go.