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Knowing there are pros and cons for each type of procurement contracts. I am trying to find the real price % increase from a time and material contract with specific scope to a fixed price.

As an example. Let's say you ask your vendor to prepare a contract to build 4 walls and a roof. He comes back and he said, it will take me 10 gold coins. 5 coins for material and 1 coin for each day I work.

Later for reasons outside of everyone's control. I need to shift the total risk of the construction to the builder (in essence converting the contract to Fixed Price). I know it will be more expensive, but how much? Is that going to increase 1 coin = 10% or 5 coins = 50% increase???

Any people in the forum with this expertise?

More details:

  1. The SOW right now that we have is T&M, so the buyer already has a quote.
  2. Because of legal reasons, we need to switch the contract to Fixed Price. Making the deal a bit more expensive for us, but also more secure.
  3. The scope is very fixed, is a simple solution. There will be lots of control to limit scope creep.
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    It is really hard to set a % increase. It depends on a lot of variables that you can't predict. It also depends with you are handling with software production, industrial production, etc. You should talk to technical experts with experience on the field in order to get an estimate of the common problems and risks.
    – Johnny
    Mar 1, 2011 at 20:55
  • I can't answer your query, but a few questions come to mind that would have a major impact. How fixed is fixed price? How well are the requirements defined? Does fixed-price mean an absolute no to amendments to the contract should there be shortfalls (in requirements)? How far into contract execution are you already? Have some of the initial risks been eliminated? Are you locked-in?
    – asoundmove
    Mar 1, 2011 at 22:58

2 Answers 2

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Completely depends on how well scoped out the project is and how detailed the requirements are.

The better and more detailed the scope and requirements, the less deviation there should be.

Assuming its well-scoped but not super detailed, I'd expect a 25% increase to compensate for unknowns.

Keep in mind that the price negotiations themselves can be a good way to flesh out the scope further between the contractor and yourself.

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  • I think both the vendor and us are very comfortable with the scope. The scope of the SOW is very small, but critical. That's why I used "building a room" as an example. The only reason we are even looking at fixed price, is because the company that hired me have some legal constraints. We learned those after the negotiations for T&M already started.
    – Geo
    Mar 2, 2011 at 13:00
  • Sounds like the only variance, then, would be what's needed for them to shoulder the added risk. If those risks are big, like indemnity and warranties, the variance will be big. If there aren't any additional big risks than it should be around 10% or so.
    – Mark Phillips
    Mar 2, 2011 at 14:53
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    10% was the difference :) Thanks Mark.
    – Geo
    Apr 5, 2011 at 13:16
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Why do you think it's going to be an increase? I would suggest to use earned value management (EVM) in order to calculate the numbers. As Mark has said, you will need to know the Scope Variance first of all.

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    Thanks Yegor. I assume an increase because I am shifting the risk of building the room to the vendor. If it rains, or the material does not get here in time, he will have to cover for the loses. I will comment about the scope in my main question, since that has been a question for most.
    – Geo
    Mar 2, 2011 at 12:57

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