The contribution of time and material (T&M) contracts to information technology (IT) firms’ revenue has been on a declining trend, reflecting a growing shift toward fixed-price. This transition is driven by evolving industry dynamics, customer preferences, and technological advancements.
In a T&M contract, clients pay service providers based on the time spent and resources utilised. This model provides flexibility for clients but often limits margin improvements for service providers. Conversely, fixed-price contracts involve a predefined cost for a project, regardless of the actual resources used. This model offers predictable costs for clients and potential margin improvements for providers, especially when leveraging software, accelerators, and automation.
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“The industry has always favoured trying to operate under a managed services and a fixed-price-based construct. The issue isn’t the industry’s inclination to do it. It’s the customers and procurement organisations who are more comfortable with it. We think the increase in the fixed-price managed services project is a reflection of the maturing of the tech services industry,” Sudhir Singh, CEO of Coforge told FE.
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Coforge reported a rise in its revenue from fixed-price contracts to 45.4% in Q3 FY25 from 42.5% in Q2 FY25. Correspondingly, its T&M revenue declined to 54.6% from 57.5% over the same period. Notably, this shift is not consistent every quarter.
Further, L&T Technology Service has shown a more pronounced shift. The company’s revenue from T&M contracts dropped from 72.1% in FY23 to 58.8% in Q3 FY25. Fixed-price contracts now constitute 41.2% of its revenue, a significant increase from 27.9% in FY23.
Fixed-price contracts are generally considered margin-accretive, as they allow companies to implement software, accelerators, and other technological solutions to optimise costs and efficiency.
Pareekh Jain, CEO of Pareekh Consulting, explained: “Fixed-price contracts help in better margins”.
The ability to use accelerators and automation allows service providers to deliver projects with fewer resources, enhancing profitability. Jain further highlighted the trade-off,
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