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How to Choose: The Truth About Fixed-Fee vs. Time-and-Materials

In the world of medical product development, OEMs looking to keep costs controlled are leaning more and more towards outsourcing design or consulting services. As with any client/vendor relationship, the financial arrangement between the two companies can cause the most friction. When deciding what arrangement works best for both parties, most often the choices can be broken down into two categories: fixed-fee vs. time-and-materials. Both involve an agreement centered on a predefined scope, but the difference is that in fixed-fee the amount agreed upon is preset, while in a time-and-materials setting the vendor is paid for hours worked.

Let’s break it down further:

One of the greatest advantages, to the client, in a fixed-fee arrangement, is transparency of cost. They are less likely to get “sticker shock” at the end of the project and can budget accordingly. This type of arrangement forces the vendor to work as efficiently as possible and focus on the end game. If the vendor completes the scope of work on time then the agreed price is paid, but if they run over time, they are still contractually obligated to complete the work, while simultaneously eating any additional cost. In order for a vendor to stay in the black with fixed-fee projects, they must focus on quoting small, manageable scopes of work that ultimately mitigate risk and can be performed on time. Where the vendor can run into trouble is when they don’t adequately define the scope parameters to the client, as anything outside the scope is an extra cost. To that end, OEMs need to ensure that the deliverables and quality expectations are clearly outlined at the start of the project.

On the flip side, with time-and-materials the advantage lies in the dynamic control the client has over the vendor’s work.  The vendor in turn is incentivized to keep up-selling the product to lengthen the scope. The flexibility of time and material however, does have a downside: without a clearly defined scope, it can be very easy for a project to go off track leaving the OEM with a large bill and little to show for it. The key to success in this type of agreement is a clear understanding, by both parties, of what the required tasks are and how long they should take to complete.

As we have just seen, there are advantages to both agreements and deciding which would best fit your organization can be difficult. OEMs need to take into consideration their business philosophy, product design history, and the structure of their organization. Here are some things to keep in mind when deciding which way your organization should lean.

Traits that make an organization more suited for a fixed-fee arrangement include:

  • Ability to sign off on large milestone payments without getting bogged down in red tape
  • Time driven results
  • An organization based on trust where open communication is valued
  • Trust in the vendor’s process to achieve the best results

Traits that make an organization more suited for time-and-materials arrangement:

  • Require freedom to change the scope at will, regardless of the cost
  • Unable to define the next scope without previous results
  • Preference for managing all aspects of product development
  • Desire to make decisions based on large data samples
  • More comfortable with incremental payments instead of one large lump sum
  • Need a wide array of choices and an overall consensus before making a decision

As seen above, there are many factors that go into choosing which payment arrangement is right for your company; a harrowing endeavor for OEMs new to the process. This is why we offer the Synectic Solution. With over 38 years of experience and a senior staff of engineers, we can accommodate even the most complex projects and demanding clients. We not only have extensive experience in medical device design, but our talents include aerospace, capital equipment, material handling, and automotive as well. Synectic consistently quotes projects along a fixed fee schedule so that we can align our goals to meet the client’s, all while keeping their best interest in mind. Even the smallest scope of work is another step towards a stronger, more confident, vendor/client relationship and a chance for us to earn another piece of the project. If you are considering outsourcing your design or consulting services, we would be happy to walk you through the Synectic Solution and show you how we can bring your ideas to life.