Compare fixed-price, time-and-materials and cost-reimbursable contracts, and manage vendors through a clear statement of work.
Why it matters
Few IT projects are delivered entirely in-house. You buy software licences, cloud services, integration work, hardware and specialist consultants. Every one of those comes with a contract, and the contract type decides who carries the risk when things change. A project lead does not need to be a lawyer, but you must understand the main contract types, what a good statement of work contains, and how to manage a vendor day to day. Always involve your procurement and legal teams: they own the contract, and you own delivery.
The main contract types
Fixed price (FP). The vendor agrees to deliver a defined scope for a set price. If it takes them longer, they absorb the cost.
- Good for the buyer when scope is clear and stable.
- The vendor adds a risk premium to the price, so you pay for certainty.
- Every change in scope becomes a change order with a new price. On uncertain work this can become slow and expensive.
- Variants include fixed price with incentive fees and fixed price with economic price adjustment (for long contracts affected by inflation).
Time and materials (T&M). You pay an agreed rate per hour or day, plus materials, for the time actually worked.
- Good when scope is uncertain or likely to change, such as an agile build or a discovery phase.
- The buyer carries the cost risk: if work takes longer, you pay more.
- Protect yourself with a not-to-exceed (NTE) cap, regular burn reports and the right to review timesheets.
Cost-reimbursable (cost-plus). The vendor is paid their actual costs plus a fee (fixed, or linked to performance). Common in research and large government programmes where the work cannot be defined up front. The buyer carries most of the risk and needs strong cost oversight.
Who carries the risk?
| Contract type | Buyer cost risk | Flexibility to change scope | Best when |
|---|---|---|---|
| Fixed price | Low | Low (change orders) | Scope is well defined |
| Time and materials | High (cap it) | High | Scope is uncertain or evolving |
| Cost-reimbursable | Highest | High | Work cannot be defined; research |
A rule of thumb: the party with the most control over the uncertainty should carry the risk. If the buyer keeps changing its mind, a fixed-price contract will be expensive and argumentative.
Worked example: two vendors on Northside Clinics
- Records integration. The records vendor publishes a stable API, and the work is to build and test six defined interfaces. Northside uses a fixed-price contract with payment tied to milestones: 30% on design approval, 50% on successful integration testing, 20% after 30 days of stable production use.
- Portal user research and design. Nobody knows yet what patients will need, and the team expects to iterate. Northside uses T&M at an agreed day rate with a not-to-exceed cap of $60,000 and a monthly burn report. If the cap is approached, the sponsor decides whether to extend.
A hybrid project often ends up with a hybrid set of contracts, which mirrors the delivery choices from module 1.
The statement of work
The statement of work (SOW) describes what the vendor will do. It often sits under a master services agreement (MSA) that holds the legal terms. A good SOW includes:
- Objectives and background.
- Scope: deliverables, and explicit exclusions.
- Acceptance criteria: how you will decide a deliverable is done.
- Milestones and payment schedule.
- Roles, responsibilities and what the buyer must provide (access, test data, decisions within five days).
- Service levels (an SLA) for ongoing services: availability, response times, and what happens if they are missed.
- Change control: how changes are requested, priced and approved.
Most vendor disputes trace back to vague acceptance criteria or buyer responsibilities that were never written down.
Managing vendors day to day
- Treat the vendor team as part of the project: include them in planning, risk reviews and demos.
- Track deliverables against the SOW, not against what was "agreed on a call". Confirm verbal agreements in writing.
- Meet your own obligations on time. A late test environment from your side gives the vendor a fair claim for delay.
- Escalate through the agreed route (account manager, then contract owner), with facts.
- Review invoices against milestones or timesheets before approving them.
Common mistakes
- Choosing fixed price for work nobody can define yet, then fighting over every change order.
- T&M with no cap and no burn reporting.
- Acceptance criteria such as "to the client's satisfaction".
- Letting the vendor's project manager run your project.
Quick recap
- Fixed price moves cost risk to the vendor but needs clear scope; T&M is flexible but the buyer carries the cost risk; cost-plus is for undefinable work.
- The party best able to control the uncertainty should carry the risk.
- A SOW defines scope, exclusions, acceptance, milestones, responsibilities and change control.
- Manage vendors as part of the team, in writing, and meet your own obligations.
Try it
Open the Do tab and test yourself on contract types and statements of work.