Profit margins in time-and-material vs fixed-fee contracts

What is a time-and-material contract?

A time-and-material (T&M) contract is a flexible agreement where you charge your client based on the actual time and resources spent on a project. Essentially, the client pays for the hours worked and the materials used to complete the job. This type of contract works best for projects where the scope, timeline, or requirements might evolve as the work progresses.

Think of it as a “pay-as-you-go” plan. If the project takes longer or requires more resources, the client covers the additional costs. This plan is great for projects with many unknowns or when the client needs room to adjust their requirements along the way.

T&M contracts reduce risk for your business by ensuring you’re paid for everything you do. However, they require careful tracking of hours and expenses to provide transparency and prevent budget surprises for your client.

The time-and-materials advantage: flexibility with accountability

Time-and-material (T&M) projects are a breath of fresh air–you get paid for the actual time and resources spent, which means less financial risk for your organization. But here’s the catch: without careful oversight, inefficiencies can creep in, eating away at your profitability. You might find yourself dealing with unproductive downtime, spiraling budgets, or misaligned client expectations. Sound familiar?

The good news is that with a thoughtful approach, you can stay on top of your profit margins and build trust with your clients.

Tips for managing time-and-material profit margins

1️⃣ Optimize resource utilization

Let‘s face it–time is money, and every unbilled hour is a missed opportunity. To keep your team operating at full efficiency, track the ratio of billable to non-billable hours. Pinpoint inefficiencies and adjust workloads to keep everyone focused on value-generating work. The right tools, such as Birdview‘s resource planning module, can make this tracking much easier.

2️⃣ Monitor burn rates

Tools like Birdview PSA allow you to track exactly how quickly the budget is being consumed relative to project progress. Keeping an eye on this metric ensures you can course-correct before things get out of control.

3️⃣ Align expectations regularly

We‘ve all been there–what the client envisioned and what‘s being delivered don‘t quite match. Regular check-ins, such as frequent updates on progress, budget use, and deliverables, help ensure clients know what to expect and feel confident about the work being done.

4️⃣ Avoid idle time

Idle time can quietly drain your profitability, leaving team members underutilized while projects stall. Avoid this by carefully scheduling assignments, monitoring workloads, and reallocating resources when needed. As a result, everyone stays productive, and no time (or money) is wasted.

Read more ▶️ Billable vs non-billable hours

What is a fixed-price contract?

A fixed-price contract is an agreement where you and your client agree on a set price for completing a project, regardless of how much time or resources it takes. This type of contract is perfect for projects with a well-defined scope and deliverables.

Fixed-price contracts come with more risks for your business. If a client requests additional work (known as scope creep) or you face unexpected challenges, those costs will reduce your profit margins. Clear communication, detailed planning, and a well-defined scope are key to making these contracts work smoothly.

The fixed-fee challenge: delivering within constraints

On one hand, fixed-fee projects offer predictability for your clients–they know exactly what they‘ll pay. On the other hand, they can put your organization under serious pressure. A single misstep–like underestimated timelines, unexpected delays, or scope creep–can cut your profits down.

Tips for managing fixed-fee profit margins

1️⃣ Define scope clearly

If deliverables, timelines, or boundaries are unclear, you‘re setting yourself up for trouble. Take the time to document everything in detail. Clear scope definition not only keeps your project on track but also helps avoid awkward conversations (and disputes) later on.

2️⃣ Track costs rigorously

In fixed-fee projects, every dollar you spend comes straight out of your bottom line. Tools like Birdview PSA can help you monitor real-time costs against the project budget so you can spot red flags early.

3️⃣ Leverage Earned Value Analysis (EVA)

EVA helps you measure how efficiently your resources are being used relative to the budget. Think of EVA as an early warning system that helps you address profitability risks before they become unmanageable.

4️⃣ Avoid scope creep

We‘ve all been there–clients ask for “just one more thing,” and suddenly, your project has doubled in size. Scope creep is one of the biggest threats to fixed-fee profitability. The solution? A formal change request process. This allows you to evaluate every out-of-scope request, determine the impact on budget and timelines, and get client approval (and additional compensation) if necessary.

Time-and-materials vs fixed-fee contract billing

Each contract type handles billing differently, and if you don‘t have a solid process in place, you might find yourself dealing with budget overruns, delayed payments, or difficult client conversations. This is when Birdview‘s Invoicing feature comes into play.

Birdview PSA supports time-and-material, fixed-fee, and hybrid billing methods so you can choose the right one for your project.

For fixed-fee projects, Birdview offers two ways:

• Flat fee for the entire project, where you can charge a set price for the whole project
• Milestone-based fees, where you can break the project into stages and charge for each milestone or task.

For time-and-material contracts, where costs depend on time and expenses, billing is based on billable expenses, hours worked, and the hourly rates set for resources, projects, customers, or specific tasks.

Using technology to manage profitability across models

Let‘s be real–juggling profit margins across different pricing models can feel like a constant balancing act. The right technology, such as Birdview PSA, is designed to take some of the weight off your shoulders, helping you stay in control no matter the pricing model.

• Real-time visibility

Imagine having a dashboard that gives you instant updates on your project‘s costs, revenue, and resource usage. You won’t have to guess or scramble for answers–you’ll have clear, real-time insights to help you make smarter decisions.

• Resource planning

Resource planning isn‘t just about assigning tasks. It‘s about making sure your team‘s strengths are being used in the best way possible. With Birdview PSA, you can optimize allocations and adjust them on the go, depending on your project‘s current needs.

• Automated reporting

Automated reporting gives you the next best thing. These insights show you how your projects are doing and flag potential risks to profitability so you can step in and fix issues before they escalate.

• Scenario planning

Scope changes, shifting deadlines, and unexpected resource needs happen. Scenario planning lets you test out how these changes could impact your bottom line before making big decisions. It‘s like having a safety net for your profit margins.

Finding the right balance

Managing a mix of fixed-fee and time-and-material projects can be challenging. Each pricing model has its own set of demands, and finding a balance between them isn‘t always straightforward. But with a little structure, teamwork, and open communication, you can make it work.

Here‘s how to keep things running smoothly:

• Create consistent workflows
  Standardizing your processes across both fixed-fee and T&M projects can simplify management and make reporting easier. Think of templates, clear guidelines, and tools that support consistency. It‘s about saving time and avoiding unnecessary headaches.
• Empower your team with knowledge
  Your project managers are on the front lines, and understanding the details of both pricing models is critical. Invest in training that helps them recognize the unique challenges of each approach so they can make smarter, more informed decisions.
• Keep communication open and honest
  Regular, clear communication with your clients is key to keeping everyone on the same page. Talk about progress, flag any risks early, and make sure costs are transparent. When clients feel informed and involved, trust grows, and conflicts shrink.

Final thoughts

Managing profit margins in fixed-fee and T&M projects is about so much more than crunching numbers. It all comes down to creating a culture where accountability, efficiency, and transparency are baked into your work.

Yes, it can sometimes feel overwhelming, but with the right strategies and tools, you can turn these challenges into opportunities. You have the power to deliver real value to your clients, keep your team on track, and protect your bottom line. Building the right systems and using the right technology, such as Birdview PSA, can make all the difference.