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Fixed Price vs. Time and Material: Which model should you choose?

Business / Development / eCommerce

Fixed Price vs. Time and Material: Which model should you choose?

When undertaking cooperation with an agency providing various types of services, you should decide on the method of settlement for the completed project. These are two basic types of settlements: Fixed Price for project implementation or based on hours worked (Time & Material).

Which model works best? In what situations? What should you pay special attention to when using each of them?

We will try to answer these and other questions in this blog post.

From the beginning, there are two different points of view: customer and IT company.

Customer point of view: I pay a predetermined price. Why would I pay for time worked? The customer sees this as a risk: developers can enter any number of hours and amount into the hourly report.

Company’s point of view: The project that client orders is not a closed product. It is not a thing that will be created once and will always look the same. The requirements can be changed, updated or developed at any time. During the work, clients can even sometimes change the main idea behind the project or the purpose of creating an application.

So who’s right? Take a look at the details of both models.

Fixed Price

Accounting in the Fixed Price model assumes the estimation of the price for the entire project in advance. The cost of the project is usually determined based on customer requirements and work schedule. Thus, it seems that thanks to such a billing system, the customer receives the expected product at the best price.

Advantages

  • All requirements, deadlines and costs are fixed in advance.
  • The client can easily plan the budget for upcoming projects. He can be sure that during its implementation, there will be no unplanned expenses.
  • Negotiating and setting the terms of cooperation can be quite a time-consuming task at the beginning. However, later all the details are included in the contract. Thanks to this, there is no need to waste time on further consultations. The customer simply waits for the final result.

Disadvantages

  • If there is a need to make any changes (not described earlier in the contract), it will be rather challenging to implement in practice. It is a big limitation, especially for the customer, because it is not possible to add or remove certain functions during the project.
  • The project price is only estimated at the beginning. It means that after its completion, the cost cannot be changed anyway.
  • After specifying expectations at the beginning, in the later stages, the customer simply waits for the final results. It means that tracking and controlling every progress of the project is simply hard.
  • When choosing the materials necessary to implement your project, the software supplier is limited by a predetermined price. As a result, they may decide to use lower-quality materials just not to exceed the price imposed in advance.

How to make both parties agree to cooperate for a fixed price? Determine exactly what the final product should be as a result of the work of the software house – develop a technical specification of the program.

The client gains:

  • a product that meets requirements
  • confidence that he will get what he wants
  • specification that can be attached to the contract with the IT company
  • tool for controlling and accounting for the contractor’s work

An IT company gains:

  • action plan
  • understanding the beginning and end of the manufactured product

Time & Material

In this case, the customer pays exactly for what was done in the project. It means that the software house bills the customer based on the hours worked and the actual material costs.

What’s more, the client will receive accurate reports containing detailed information on the progress of work on the project. It will also get access to all data and full cost transparency.

This cooperation model works when you are not sure about the shape of the final effect you would like to achieve, and the scope of the project is wide. If your goal is to create a product that exactly matches your needs and would like to co-create it with a software supplier, time & material will be the right choice.

What are these “materials”? – These are the costs of licences, servers etc.

Advantages

  • In this case, the customer can make any changes to the project, regardless of what stage it is in. Any functionality can be added, changed or removed. The project requirements set out at the beginning will not be any limitation – they can be adapted to changing business circumstances. It is also possible to prioritize tasks depending on what the client cares about the most. There is no such possibility with fixed price – the final result is expected.
  • Active participation in the creation process – real impact on the final result. Thanks to the commitment and contribution of the customer, it is much easier to achieve the desired effects. Both the client and the members of the outsourcing company are one team that aims to achieve the same goal. 
  • Having insight into the entire process, the client may at some stage decide (e.g. due to budget or time) to simplify certain elements or functionalities, or to abandon them altogether. Thus, it has decision-making power over the budget. It depends on him whether the project will last for months or not.
  • Much faster, you can sign a contract on a time & material basis. First of all, because you don’t waste time on auctions related to the terms of cooperation. The outsourcing company is ready to start the project as soon as possible. You will discuss all the details and tailoring them to your expectations.
  • Each part is estimated so that the cost outline is known. This can sometimes change during development, but then the software house informs you that the work on a given functionality will be extended. Then the client makes the final decision whether the work is to be continued or not.
  • Agile methodology. The use of the time & material model will affect the higher quality of the final result. During the construction of the project plan, the outsourcing company divides the development process into several phases. At the end of each stage, the work results are tested and consulted with the client’s company representative. It is the perfect time to share your opinion and provide feedback on any changes or improvements.

Disadvantages

  • Less control over the budget. A company usually has a specific budget for individual projects. When deciding on the time & material model, you should be aware that costs can increase significantly if the scope of the project increases. For example, you might find that you needed a lot more functions than you originally planned. In this case, the cost of the final result will be higher. Nevertheless, the final product will fully meet expectations.
  •  Large commitment. On the one hand, the possibility of having a real impact on the final effect is a significant advantage of the time & material model. On the other hand, controlling the implementation of individual project stages requires a lot of time. It means that a person should be appointed responsible for this activity in a given company.

Fixed Price or Time and Material? Find out which one is better for your business!

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Myths about working in the Time and materials model

“The company will say that it worked on a simple task a thousand hours.”

In most cases, tasks should first be estimated (i.e. pre-valued). By making an appointment for each work, the contractor can save how much this task can take.

“When buying programmers time, I don’t know what the final product is”

Well organized work should be divided into stages (sprints). The effect of each sprint should be a piece of software. When you receive this sprint, you can see what has been done.

When to use Fixed Price and when to use Time & Material?

Fixed Price:

  • clear requirements and set deadlines
  • limited or fixed budget
  • creation of MVP
  • small project with limited scope

Time and material:

  • the scope of the project is not fully known
  • a long-term project with dynamic requirements
  • the need for flexibility to modify the scope of work

And the winner is …

There is no final winner in this matter, however, in most cases, the best choice is Time & Material, because of the flexibility it gives. Choosing the right work model depends on many factors, such as the scope of your project, the company’s goals and the budget you have. You may find that the best solution for your project is to combine both options. Then, the key part of the work can be commissioned with the option Fixed Price and the development of the project based on the Time and Material model.

We are dealing with different projects that need different solutions. We treat each of them individually, that’s why if you want to know which model fits best in your case, contact us using this page or the contact form below.