The T&M Trap

The T&M Trap: Why Open-Ended Software Budgets Kill PE Exit Multiples

The Private Equity investment thesis is built on a 3-5 year horizon of accelerated, predictable value creation. A crucial component of this is optimizing the technology assets—often proprietary software platforms—that drive the PortCo's competitive edge. Yet, the common industry approach to engineering and modernization harbors a fatal flaw: the open-ended Time & Materials (T&M) contract. T&M is a guarantee of scope creep, budget erosion, and unpredictability, transforming a strategic investment into an uncontrollable overhead cost. This high-risk gamble directly threatens the value of the saleable asset at exit.

The superior strategic alternative is a model built on Fixed-Bid predictability, guaranteed quality, and perpetual governance. This is the mechanism for transferring the complexity and risk of a software engineering practice away from non-tech PortCo leadership and guaranteeing a scalable, high-quality asset for the full holding period.

‍

The Problem: Complexity, Overhead, and The Talent Attrition Cycle

For a PortCo leadership team focused on operations, finance, and market expansion, building and managing an internal, world-class software engineering practice is a costly distraction and an insurmountable operational complexity.

1. Continuous, Non-Core Overhead: T&M engagements perpetuate the need for internal overhead to manage the vendor, validate hours, and oversee quality. More critically, they fail to solve the need for a Head of Engineering/CTO function. This forces the CEO/CFO to divert time toward micro-managing a technical practice they are not equipped to govern.
2. The Talent Churn Tax: Hiring and retaining top-tier, long-term software engineering talent is the domain of technology companies, not the core competency of a typical PortCo. The cost of continuous talent attrition, coupled with the slow ramp-up time for new hires, ensures that engineering effort is perpetually focused on low-value, high-complexity transition work rather than strategic development. This is the inevitable sunk cost that T&M models mask.

‍

The Governance Gap: Where T&M Directly Accrues Technical Debt

The greatest long-term threat to the exit multiple is technical debt. This debt is not a feature of the code, but a direct result of a lack of mandatory, disciplined governance programs over the 3-5 year horizon. T&M models actively incentivize a lack of governance:

• Misaligned Incentives: T&M rewards vendors for hours worked, not for the outcome or efficiency of the deliverable. This creates a systemic disincentive to document, refactor, or invest in continuous integration—the very activities that mitigate technical debt.
• The Unchecked Scope Creep: Without a Fixed-Bid mandate, every 'minor' scope change becomes a budget expansion. Non-technical leadership approves work based on immediate needs, not long-term architectural stability, leading to a tangled, unmanageable asset by the third year.
• Undermining Due Diligence: During the exit process, the buyer's technical due diligence team will audit the platform's stability, documentation, and maintainability. An asset developed under an undisciplined T&M model—riddled with technical debt—will result in a discounted valuation and a lower final multiple.

‍

The Long-Term Strategic Solution: Governance-Led Predictability

Transferring the risk, complexity, and open-ended cost of the engineering function is the ultimate strategic maneuver. This is achieved by adopting a service model that fuses the financial discipline of Private Equity with world-class engineering governance.

We replace the high-risk, open-ended T&M gamble with an engineered solution:

1. Financial Predictability through Fixed-Bid: Every engagement is scoped and delivered under a Fixed-Bid model. This is the mechanism that forces our engineering practice to own the complexity and deliver the outcome, guaranteeing budget certainty for the entire 3-5 year hold. The PortCo CFO can forecast the precise cost of asset evolution with zero risk of T&M overruns.
2. Unparalleled Quality Assurance: Our confidence in governance and execution is codified in the 90-Day Zero Defect Warranty on our deliverables. This unparalleled guarantee shifts the quality risk entirely from the client to the partner. If a bug is found within 90 days, we fix it on our dime. This aligns our incentive directly with delivering high-quality, maintainable code from day one.
3. Sustained Value through 'as a Service' Model: We provide True Managed Services through a long-term Platform Management as a Service and Platform Development as a Service model. This is the framework for mandatory governance, ensuring continuous maintenance, controlled evolution, security patching, and documentation over the entire investment horizon. It guarantees the software asset is an engine of value, not a source of liability, at the point of exit.

Control the Outcome, Control the Exit

The choice is stark: Continue the industry tradition of the T&M gamble, accepting budget uncertainty and the accrual of technical debt that will ultimately depress the exit multiple. Or, choose the predictable, guaranteed path.

Our partnership model replaces the high-risk gamble with a predictable, guaranteed path to maximizing the saleable asset. By mandating Fixed-Bid engagements, backing every delivery with a 90-Day Zero Defect Warranty, and instituting perpetual Governance-as-a-Service, we control the software outcome. When you control the outcome of your most critical digital asset, you control the valuation at exit.

‍