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.
“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.
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, noting that while fixed-price contracts provide margin opportunities, they also carry risks if project requirements are underestimated.
“Fixed-price contracts are a double-edged sword. If you don’t get the rules clearly defined, you might lose the margin. But going forward, for GenAI-based products companies will prefer more fixed-price contracts,” he added.
While T&M contracts offer flexibility, their potential for margin improvement is limited. They are also less conducive to leveraging technological solutions. Many analysts have also criticised the T&M model for allowing companies to pass inefficiencies to customers and profiting from them.
Further, generative AI (GenAI) is playing a pivotal role in accelerating the shift toward fixed-price contracts. The technology enables faster and more efficient project execution through automation and predictive analytics.
As service providers increasingly integrate GenAI into their offerings, fixed-price contracts become more attractive, allowing them to pass on savings to clients while retaining a portion for themselves.