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Fixed Fee or Time & Materials - Which is the best model for your SAP project?

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Soon after selection of the implementation vendor, you will have to prepare a contract to engage with your SAP systems integrator. As such comes the tricky question ? Do you engage in a fixed fee contract or time and materials for the next phase or your entire project. The answer is not simpler either. My personal choice as always has been to go with a fixed fee engagement model but this may not always be possible depending on the type of SAP solution your company is implementing and some other factors that are discussed below. I will share my perspectives on both fixed fee and time & materials engagement model and at the end this should guide your project leadership in making a better decision. I have discussed points at a very high level and the actual decision will be based on your project specific circumstances.

SAP Fixed Fee Contract

In a fixed fee contract, you are asking your SAP implementation vendor to deliver particular phase or the entire SAP solution for a fixed price. Within the contract or SOW you should include the exact scope of the solution you need to implement. Any change or addition to this scope will have to be reviewed and processed by the change control committee of the project.

This model may not suit every SAP customer and the following aspects need to be considered before making a proper decision.
  • Clarity of Business Requirements: Your business teams should define the high level business requirements as clear as possible. While your project leadership is in the process of selection of the implementation vendor (SI) you should have the business teams to start discussing the business requirements and document these business requirements so that it can be included in the statement of work for the fixed fee engagement. Incomplete or lack of clarity on high level business requirements in your SOW can result in a poor quality or incomplete SAP solution.
  • Packaged SAP Solution ?: Are you implementing an SAP solution or multiple modules that is more standardized ? This means that the standard SAP functionality aligns better with your business requirements with fewer RICEF especially enhancements or custom development. Since there are less uncertainties with SAP standard solution, fixed fee model should be favored.

Time & Materials Contract

In this model, you (the SAP customer) agree to pay the implementation vendor based upon the work that was done by the vendor resources on the project. This engagement is preferred when your project scope is not clear such that it can be included in the contract. Also, if you are doing sizeable custom development in SAP to meet your business needs there may be uncertainties to build a custom solution. It may be wise for the vendor and SAP customer to engage with a T&M contract. Word of caution: You should closely monitor the cost per resource and total effort spent of deliverables to keep to project costs from blowing thru the roof.

Points to consider for going forward with a time and materials contract.
  • Changing scope or lack of clarity: You are implementing future state SAP solution which sometimes may mean you want to change the way you handle certain business operations. If you are planning to change your business process and per say opt for best practices in future SAP solution, you may not be able to define the scope of work in exact terms. Also, your business teams may not be setup or did not have sufficient time to define clear high level business requirements. I recommend that you should opt for time and materials engagement terms for either of these two scenarios.
  • Large RICEF or custom development: Your business may have additional business processes that are not addressed by SAP or you may need to do significant enhancement to processes in SAP. As such if you have large number of RICEF items or significant custom development in SAP there may be lot of uncertainties on cost, design and feasibility with these heavy custom built objects. SI may not be able to agree to fix the price of building these objects for a path that was never taken before. You should mutually consider a time and materials contract with measures in place to ensure that costs to implement such a project is within a reasonable margin. Always consider 10-15% contingency funds to cover these uncertainties.