The Hindu Business Line : Betting on fixed price vs T&M contracts

WHEN the US slowdown hit Indian software vendors in late 2000, industry watchers had predicted the rise in client preference of fixed price contracts, as opposed to time and material projects. Figures for the 12 months ended March 2004 show that several companies continue to rake in a good chunk of their revenues from time and material projects. However, fixed price contracts are gradually upping their contribution to revenues.

Fixed price contracts help clients arrive at a fee that they would pay the vendor for a project done within a deadline. If the vendor meets the deadline using, for example, 100 people instead of 1000, that is to his advantage. If his team is inefficient, he loses out by using more people to meet the deadline. Contracts for which fees are based on time taken and manpower used are called `time and material' or T&M contracts.

Percentage of revenue from T&M contracts to total revenues has increased between March 2003 and March 2004 for Infosys and Polaris. For Satyam Computer Services, iGate Global Solutions and Cognizant Technology Solutions, the percentage of fixed price contract revenues has increased. Growth of absolute revenues through T&M has been faster only for Infosys and Polaris. iGate, Satyam and Cognizant have shown higher growth in revenues from fixed price projects.

Figures for the last 12 months were not immediately available for Mastek Ltd and HCL Technologies. For Mastek, revenues through T&M actually slumped in the March 2004 quarter, compared to the March 2003 quarter. HCL Tech showed a significantly higher growth for fixed price contracts for the same period.

An analyst with a foreign brokerage said that some customers prefer fixed price contracts as a policy. Significantly, GE is a major customer for both Satyam and iGate. Both vendors have seen a slump in percentage contribution of T&M projects to total revenues and have also seen higher growth in absolute revenues from fixed price contracts.

But why would not a client insist on fixing a price to every contract instead of giving vendors a free rein? Says the analyst, "Clients typically keep their choice alive through the life of a project. If they feel that either cost or time is getting out of control at any point, they want to be able stop work or shift to another project."

If a vendor offers a new service for which he has no past experience, he may prefer a fixed price contract. Here, too many uncertainties might make expenses spurt, the analyst said. So, when is a fixed price project preferred? When vendors want to increase billing rates for a new project but cannot do so with an existing client, T&M goes out the window and fixed pricing becomes the norm.