Every IT project is unique – from the scope of work and the team behind it to the billing model, which is crucial to the success of the entire project. The two main pricing models are Fixed Price and Time and 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: the customer point of view and the IT company point of view.
- 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 the 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 also change the project’s main idea or the purpose of creating an application.
So who’s right? Take a look at the details of both models.
- Fixed Price Contract – Rigid Framework for Budget Certainty
- Time and Material Contract Flexibility at the Center of the Process
- Why T&M Is Better for Customers
- Myths about working in the Time and Materials model
- Time and Material Contract in Clash with Reality
- Quick-Summary-Time and Material Contracts advantages
Fixed Price Contract – Rigid Framework for Budget Certainty
The Fixed Price model is like an elegantly designed Rubik’s cube – each piece must fit into the whole at the outset in order to begin work. In this option, it is necessary to carefully determine the scope of work, which is determined at the beginning of the cooperation. As with any well-planned construction, changes made after the start of the construction process are difficult and often costly. A one-time payment may seem attractive, but it also carries high mark-ups. The client pays for 'certainty’ but also for any 'uncertainties’ – a margin of risk that the contractor must include in the final price. The closed project scope means that every change request after the project has started results in negotiations and additional costs. In this model, a great deal of time is spent on initial estimates to protect both parties from unexpected expenses. In practice, however, it is rare that an IT project can be put into such a rigorous framework. The complexity of most modern IT systems makes rigid pricing a challenge bordering on fortune-telling.
When to use Fixed Price Contracts?
- Clear requirements and set deadlines
- Limited or fixed budget
- Creation of MVP
- Small project with a limited scope
Time and Materials Contract – Flexibility at the Center of the Process
Now, let’s take a look at the Time and Material (T&M) approach, which can be compared to LEGO bricks – you start with a basic set, but as you build, you can buy more pieces, modifying the construction project according to your current needs. In T&M, the project scope is flexible and, although defined at the outset, can evolve as the project progresses. Importantly, payments are made regularly, on a monthly or sprint basis, depending on labor hours and materials put into the project. This underlines the fluidity and dynamism of this model. T&M’s flexibility is its greatest asset – it’s easy to add new change requests, allowing the product to adapt to the client’s changing business needs continually. The lack of initial markups associated with anticipating every possibility means that the customer pays only for the work done.
What are these “material costs”? – These are the costs of licenses, servers, etc.
When to use Time and Material Contracts?
- 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
Why T&M Is Better for Customers
Customers value the ability to adapt to changing circumstances, and T&M offers just that flexibility. In IT projects where innovation and responsiveness to a changing market are key, T&M enables rapid pivot and implementation of new features without overpaying or exhaustive renegotiation.
Myths about working in the Time and Materials pricing method
“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.
Time and Material Contract in Clash with Reality
Finally, T&M, in practice is an approach that requires commitment and trust from the client, but it also provides greater control over the project and its budget. By paying for time and materials, the client has a constant view of where its funds are going, which translates into better transparency in the process and labor costs control. In the T&M approach, the client-supplier relationship evolves into a partnership, where both parties work together for the success of the project. It’s not just convenient billing but a collaborative philosophy that prioritizes agility, adaptability, and continuous product improvement. Although not stated explicitly, in the rapidly changing world of IT, where uncertainty is the only certainty, the Time and Material pricing seems to be the optimal path, allowing for maximum flexibility and efficiency in both project management and customer billing.
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Quick Summary – Time and Materials Contracts 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 the client’s concern. There is no such possibility with a 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.
- You can sign a contract on a Time and Material basis much faster. 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 tailor them to your expectations.
- Each part is estimated so that the actual cost is known. This can sometimes change during development, but the software house informs you that the work on a given functionality will be extended. Then, the client makes the final decision on whether the work is to be continued or not.
- Agile methodology. The use of the Time and 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.