Every IT contract is unique, but that doesn’t mean we’re drafting it from scratch. Businesses and lawyers widely adopt some common types of IT contracts due to their proven track record in legally protecting developers and clients. The most widely used are Time and Material (T&M), Fixed Price, Outstaff, and SLA–each complying with the particular business model and tailored to work best for it.
However, at Tretten Lawyers, we often deal with situations where terms from one type of contract suddenly “migrate” into another. For instance, the client may include high requirements appropriate for ‘Fixed Price’ with its higher rates into T&M (usually with lower rates). Whatever the reason–the demanding client or vendor’s non-acquaintance, the result may be financial losses for the IT company.
All main types of contracts are here for a reason. Let’s determine what each entails and how to protect your business from unpleasant outcomes. In this article, I’ll explore ‘Time and Material,’ which is probably the most popular in CEE.
What is ‘Time & Material’?
Under the T&M contract, the client pays not for the certain result achieved but for the time spent on the development.
It is best for extensive projects or long-term cooperation when the client has just a rough idea of what the product should be but cannot provide precise technical specifications. Thus, the developer isn’t responsible for the quality because it’s not clearly defined.
Such projects are usually executed in stages, and the product can evolve during the process. The developer estimates the time needed to deliver the expected results and charges the client an hourly rate. Anything extra (say, the client suddenly asks for a new feature that wasn’t mentioned before) will be charged separately.
That is why rates are usually lower under T&M contracts than under ‘Fixed price,’ where they include potential revisions.
Example: the team was tasked with creating a website for the client with a certain set of features. The developers delivered that on time, but then the client decided to add some new categories to the website, which he had spotted from competitors. In that case, the developer says: “That would take us approximately 15 more hours at X€ each.” The client can accept or decline the offer, but he pays for the hours spent on the original project by default.
Wrapping it up, T&M doesn’t contain any specific quality criteria tied to payment. The client should not be able to refuse to pay for the work, citing that it does not meet his expectations.
What can lead to financial losses?
A traditional T&M contract won’t cause you any trouble. The problems start when the client mixes rules from different contract types, which usually benefits their interests, not the developer’s.
In my practice, I’ve often seen the following elements that used to leak into ‘Time and Material’ from a ‘Fixed Price’:
The ‘Time & Material’ contract contains quality criteria.
This means the developer still works at lower rates, but if he needs additional time to achieve some quality benchmarks (usually not clearly defined by the contract), the client won’t be obliged to pay for it.
The client pays only for ‘undisputed’ invoices.
Say you’ve signed an agreement under which you have to complete a specified scope of work in a specified time frame. Under a proper T&M contract, the client pays you as soon as the job is done. However, we often see a clause about the acceptance stage in those contracts. This means the client must accept your invoice within a certain period, say, 5 days; otherwise, it is automatically deemed accepted. And alone, it’s okay, but together with that ‘undisputed’ thing, beware. If the client isn’t satisfied (no matter how, because your contract does not contain any quality requirements), the invoice is automatically reclassified as ‘disputed,’ giving them a legal reason not to pay until they are happy with everything. And the time spent fulfilling their desires may not be paid for.
What do these two cases have in common? Money losses for the developers. Unpaid hours spent on extra work to meet sometimes quite ephemeral quality standards often aren’t calculated in advance and come with a lot of pain and demotivation afterward. But companies can avoid it.
How can you avoid losing money under the ‘Time and Material’ contract?
Be confident, and don’t be tempted by the desire to please the client. Charging the out-of-scope work under a ‘Time & Material’ contract is a common practice globally. If the client wants more, then probably this type of contract isn’t the best option and you should consider a ‘Fixed Price’ instead.
But if it comes to T&M, make sure that all the specifics of that type of contract are met:
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- No technical specifications are included – the client has only a general vision of the expected outcome;
- There are no quality requirements;
- The client pays for the hours spent on the project, and this also applies to extra work for add-ons or revisions.
Before signing, carefully review the contract with a lawyer. If necessary, ask the client to reconsider clauses raising concerns. A contract is not something you do to please the client; it must protect both parties equally. And that is what you must strive for.
