Mike Wyatt's Weblog

Danger: Projects with Not to Exceed Pricing structures

During my time working in the services delivery groups of Software providers, I've seen a fair number of projects that were originally proposed at Time and Materials but were converted during contract negotiations to Not to Exceed.

What is a Not-to-Exceed (NTE) project? NTEs are a mixture of both fixed-fee and time and materials pricing structures. The project is treated as a time and materials project with a cap on expenses. From a customer perspective the best of both worlds - you only pay for the work performed at the negotiated rate but can budget based on the cap. From a service provider perspective, it is the worst case scenario. If you over achieve and finish the project early you earn less money - no upside. If the project takes longer than expected, your revenue is capped but not your expenses or costs to delivery. Obviously customer like this option at face value.

Unfortunately, given the risk of projects that are NTE, service providers concerned at all about the margin will tend to be fanatics about change management / change control which sets up a less than ideal situation for collaboration between the customer and the service provider. In the other case where the project is treated as Time and Materials until the point the money runs out and doesn't have strict change control, there is usually a scramble to just "get done" and both process and quality are thrown out the window. Neither situation is good for the customer OR the service provider.

For either the customer or the service provider, there needs to be clear expecation setting about change control and overall change management should the decision be made to go with an NTE.

Posted at 10:28AM Oct 30, 2006 by Michael Wyatt in Identity Management  |