Fixed Bid vs Time And Material Contract For ERP Projects

So your company has finally reached the tipping point. Your team has decided it’s time to replace the existing financial system/enterprise resource planning (ERP) system. You’ve seen demos of the various systems. You’ve decided that the Microsoft Dynamics GP system is the best fit for your business needs. You’ve selected an ERP service provider and now it’s time for contract negotiations. Should you ask for a fixed bid contract or a time and materials (T&M) contract? Below are some conditions favoring one or the other but my recommendation is a hybrid of the two concepts (A Fixed Bid With An Overage Cap & An Incentive Plan).

Fixed Bid – This is a contract based on a fixed amount. So you’ll pay the mutually agreed amounts regardless of the number of hours worked by the vendor.

Please bear in mind that with Fixed Bid contracts it’s equally important (if not more so) to insure that the project scope is crystal clear to both parties and that the project scope is comprehensive to meet all of your business requirements for your new ERP project. If not then the project will either leave you with less functionality that what you had expected or it will end up costing you more than the mutually agreed upon fixed bid price.

Conditions favoring a Fixed Bid:

  • If your project scope is clear and well defined in detail
  • If you don’t want much flexibility with the project scope
  • When you want to determine a precise budget in advance
  • When you want simplicity regarding required project documentation (i.e. not needing to review project task details to validate the hours worked)

Time & Materials Bid – This is a contract based on the actual hours worked. So you’ve agreed to pay the vendor for each hour that they work.

Conditions favoring a T&M Bid:

  • When you’d like flexibility in the project scope to meet changing requirements
  • If you want to monitor and manage the project in detail (i.e. reviewing detailed project timesheets to validate the service hours provided).
  • When you want simplicity regarding project documentation pertaining to project changes (i.e. not needing to create as many Change Order documents if new project tasks are requested)

(Preferred Method) Time & Materials Bid With An Overage Cap – This is a contract based on the actual hours worked but with the addition of a “not to exceed amount, i.e. 10% overage cap”. Based on my observation of scores of Microsoft Dynamics ERP (and other small/midsized ERP projects) over the last several years, I favor this method because it offers the benefits of having controlled costs that are inherent with the Fixed Bid methodology as well as the flexibility inherent with the T&M methodology.

In addition, I recommend incorporating an “Incentive Plan” for the vendor. With a T&M project the client benefits from the efficient work from the vendor since the project hours (and the resulting project costs) will be lower. Conversely, the net effect of efficient workflow for the vendor is that their revenues will be less. Thus to make it a “win-win” scenario I recommend incorporating an incentive plan into the contract that allows the vendor to share in the benefit of their efficient workflow.

For example if the project budget is mutually agreed upon to be $100,000 and the actual project costs ends up being only $80,000 (as a result of efficient workflow from the vendor and not because of a reduction in the project scope) then the $20,000 difference would be divided by two and a $10,000 bonus would be paid to the vendor. Of course the client saves $10,000 as well so it’s a win-win scenario. Such an incentive bonus would encourage the vendor to maximize project efficiency for the mutual benefit of the client and the vendor.

Conclusion: There are valid arguments for pros/cons of each of the three contracts mentioned above. Regardless of which one you decide to use good communication, proper project management and proper monitoring of project costs will insure project success. In addition I recommend a thorough check of 2-3 customer references of the vendor you select.

In conclusion, if you’d like assistance with;

  • Requirements Analysis
  • RFP design
  • System selection
  • Vendor analysis and selection

Then please contact Calsoft at 1-888-838-8422 or Send us an email

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