Time and Material Death Spiral
In the custom software business time and material implementations are by far the most common implementations. A "time and material" (T&M) project is one in which a client is responsible for covering the cost of both the labor hours put in by a vendor's staff as well as the materials required to finish the project. This kind of pricing arrangement can be risky for the client because it can lead to a "death spiral" if the project scope or requirements change significantly or if the vendor's team is inefficient or not well-managed. Additionally, this type of pricing arrangement can be risky for the vendor as well.
The following is an example of how the death spiral can take place:
The client and the vendor come to an agreement on a T&M project, which includes the estimation of the required number of hours and materials to finish the project.
The scope of the project or the requirements may shift as the work on the project progresses, which may result in an increase in the total number of hours required to finish the work.
The customer is billed by the provider for the additional hours that were worked, which results in an increase in the total cost of the project.
The increased cost of the project places the client in a position where they have fewer financial resources available, which may prompt them to suggest to the vendor that they cut back on the number of hours worked or the quality of the work.
The request made by the client is granted by the vendor, but as a result, the team's effectiveness and efficiency are negatively impacted, which results in an increase in the total number of hours required to finish the project.
The cycle continues, with the cost of the project continuing to spiral out of control as the number of hours required to complete the project continues to increase while at the same time the quality of the work continues to decline.
It is essential for the client and the vendor to carefully manage the scope and requirements of the project, as well as to establish clear expectations and boundaries at the outset, in order to prevent the T&M death spiral from occurring. It's possible that other pricing structures, like a set price or one that's based on the customer's perceived value, would be more appropriate in certain scenarios.