Fixed-Price Vs Time And Material Model – What To Choose?
Sometimes, buying an already existing solution for your company is not enough. It doesn’t have the features you need, or it doesn’t work well with your tech stack. Or maybe existing options on the market are very limited, and you need software built from scratch. Since you don’t have the time or personnel necessary to build this kind of tool yourself, you have decided to ask a software development company for help. You have prepared a list of requirements for your solution, picked a software company, and booked a meeting.
Now, it comes to the most critical part – picking a cooperation model. The consequences of choosing the wrong type of contract for your business can be severe, from having no way of changing or replacing features, through ending up with a rushed or unfinished product, to going way over your budget. Therefore you must think carefully about the type of contract that will suit your needs best.
At Savvycom, we offer three different cooperation models:
- Time & Material
- Fixed Budget
If you are wondering which of these cooperation models would be best for you then you’re in the right place. In this article, we will take a look at the three aforementioned contract types and how they work.
We’ll also mention which types of projects work best with each model in order to guarantee that you will receive your ordered product on time, that it does exactly what you wanted, and without straining your budget (or nerves!).
1. What is the Fixed-Price model?
A Fixed-Price cooperation model works just as it sounds. You pay a lump sum of money to the developing company in exchange for specific results being delivered. It’s one of the most popular cooperation models because a fixed-price contract makes companies feel safe and secure. They have a set budget and thus are guaranteed not to pay anything more than that for the project. If a company needs to strictly plan their budget and expenses, this cooperation model admittedly sounds attractive.
What’s more, there’s a “set in stone” deadline by which time the client is “guaranteed” to be presented with the ready product. And with a detailed plan including goals and milestones, they can easily track the progress of the project. There’s no need for the client to supervise the project either, so everything sounds clear and predictable. If your project is a small one, with clearly defined features and little risk of things changing, a Fixed-Price model might be what you need.
2. How does the Fixed-Price model work in practice?
Let’s say you need to order a cake for a parent’s birthday. You asked them what type of cake they would like, and they definitely want a chocolate chip cake. So you call a bakery and order a chocolate chip cake. The bakery then asks how big the cake should be and gives you a price for the chosen size. You pay for the cake that you want and the bakery delivers it on the due date. This is exactly how Fixed-Price cooperation models work – it’s all pretty straightforward when it comes to simple products. However, this type of contract also has several drawbacks.
Imagine a different scenario. You have already ordered a chocolate chip cake, but then your mother calls and says she would prefer a strawberry sponge cake instead. Can it have a different text on the icing too? You call the bakery to change the order, but they refuse. Since they have everything ready for the chocolate chip cake, they can’t change the order. They can only make a second cake, for which you will have to pay extra. They could add the text to the original cake, but that will also cost you extra.
Project models work in a similar way – if you have a detailed plan and a list of guidelines that you are certain won’t change, a Fixed-Price model is an option to consider. However, Fixed-Price contracts also have a number of flaws.
3. Fixed-Price contract disadvantages
At some point during your project, you might learn that you won’t need one of the features identified in the contract, but you will need a different one. You also need a newer version of API, and support for the new system. With a Fixed-Price cooperation model, changing the scope of work requires additional procedures and usually the formal flow too. For bigger changes this is justifiable, but for small adjustments the overhead on the formal flow makes the work much more expensive. This is because a task that only takes a developer a few hours has to firstly be discussed with management, some risks assessments have to be added to the estimate, then quality assurance, a code review, and deployment, etc., have to be completed too. That means you will have additional paperwork and will also need another meeting with the development team just to discuss the changes, which might endanger the deadline (and your budget).
Before choosing a fixed-time contract you need to schedule a meeting with the development team first, during which you will discuss all of the project specifications. These must be crystal clear to both you and the developer, so you need to plan down to the finest details. You also need to discuss all actions that the development team should take along with possible risks and pitfalls, so bear in mind that you might need several meetings just to have everything specified and accepted. Otherwise, it might be that the final product isn’t exactly what you hoped it would.
There’s also another problem that can occur with fixed-time models. That is the more complicated the project is, the higher the chance that problems will arise. Regardless, the software company is bound by the deadlines and the budget is set in the contract. In a rush to adhere to the schedule, the development team might cut corners and produce a barely usable product.
4. When can you safely choose a Fixed-Price contract?
- It’s a small or medium sized project or an MVP
- You have clearly defined your needs and expectations to the developers – and by clearly we mean you’re able to outline the user’s path step by step and you have some experience in writing user stories
- The project requirements won’t change
- You have no need or time to have meeting sessions with the development team
- There’s little risk of development problems happening so you can hand over all control to the developers
- You have a limited budget for the project, or you need to get the project budget approved first
- You are not interested in the time taken but in deliverables, which means that sometimes the project is finished faster but you are still charged the estimated amount
5. What is the Time & Material model?
The Time and Material model works on a completely different principle than the Fixed-Price model. In Time and Material, rather than pay a fixed sum right at the start, you pay the software team for the hours of work needed to finish a given project and for all of the materials they use. This type of cooperation model is useful when you cannot accurately estimate how much the project will cost or how long it will take to complete, so there’s no set price or rigid deadlines for the team.
6. What are the biggest advantages of T&M contracts?
The most significant advantage of a T&M cooperation model over Fixed-Price models is that you retain much more control over the project. You can also change elements of the project when needed. If you don’t yet have a detailed vision of the product as a whole, the Time and Material model is also a great pick.
With this type of contract, you can decide in which direction the project should go as it progresses. If there’s a sudden need to rework some parts of the project then simply add new features, or if an unexpected issue arises then the T&M model allows you to adjust the work schedule as required. The development team can also start working straight away, even if they (and perhaps you) don’t know all of the project details yet. Those can be discussed in later meeting sessions.
How does it work in practice? The whole project is divided into smaller tasks that each have an estimated time, workforce, and cost. When you agree with the price quoted, the development team can start immediately. During the project, there will be several meetings with the team during which you can add suggestions and ask for modifications. This way, at the end of the project, you will receive a high-quality product that exactly fits your needs.
7. Things you should consider before opting for a T&M contract
It all sounds great, but the main thing that might worry you here is the budget. How can you control the amount of money spent on a project without a defined price set in the contract? And if you are paying the team for the hours they spend on your project, won’t the final cost turn out to be much higher than the initial budget?
Controlling the budget of a Time and Material cooperation model is actually much easier than you might think. Each task in the project comes with an approximate cost, so you can estimate the project cost in advance. To make controlling the budget more manageable, you will also be sent regular detailed reports about how much time the development team has been working on a given task, how many people were involved, what materials were purchased, and any other extra costs.
Controlling the progress of the project might be a bigger problem. A Fixed-Price model allows you to leave all of the work to the developers until the product is ready.
Time and Material, on the other hand, requires constant supervision of task progress, materials used, and budget spent, as well as frequent meetings with the development team. Monitoring is especially important since there’s no definite deadline in the contract, and you don’t want a six month project to turn into a year. You should also keep in mind that, unless there’s some bonus in the contract to be paid if the development team finishes ahead of schedule, there’s little incentive for them to finish the project early.
We work on because most of the clients we are working with have problems in stating their all requirements upfront.
8. When should you choose a T&M contract?
- It’s a complicated or long-term project
- You don’t know the full scope of the product, only a basic description
- The requirements or needs are likely to change
- You want to have full control over product creation and development
- You need maximum flexibility
- You want to pay for spent time only, as compared to a Fixed-Price model it is the most cost-effective solution for long-term projects with changing scopes
9. Fixed Budget/T&M with cap
If you are still worried about exceeding the budget for the project, there’s a third cooperation model we can use called Time and Material with a cap. This is the same as a regular T&M contract but with one change, which is that the contract specifies an upper limit of cost that you will not have to pay more than. If the cost of the project rises above the threshold, the development company will cover the additional outlay. This way, you can have all the benefits of a Time and Material contract without the risk of the project cost being far higher than expected.
Fixed Budget/T&M with cap is very well suited for companies that have a very dynamic change of priorities, but still need to keep control over their budget. The key difference between typical Time and Material and T&M with a cap is that Savvycom takes care of budget control. Savvycom monitors the costs, reports how far we are with the progress, and identifies risks if the scope of the project is not delivered in line with the provided plan. The key difference with the Fixed-Price model is the fact that Savvycom allows clients to introduce changes to the scope of work dynamically and recalculates the available budget accordingly. If the budget needs to change, Savvycom reports this as soon as possible and reacts on-the-fly to the client’s decisions. This model is the most collaborative and provides the greatest value to the client.
Fixed Budget projects have the same benefits as the Time & Material model, plus:
- our Project Manager takes care of budget control
- they are also in charge of managing the work-load to keep all members focused and at full speed as much as possible
Both cooperation model types have their advantages and drawbacks, so each one works best for different types of projects. If you have a small project with detailed guidelines or when you are sure that no changes will be needed, a Fixed-Price contract is a good option. You will know what the cost of the project will be in advance, and your product will be ready on the due date. However, you need to be prepared for unexpected issues or errors arising that might either postpone the deadline, result in additional costs or leave you with an unfinished product.
For larger or long-term projects, a Time and Material contract would be a better choice. It offers flexibility and control of the product creation, while also helping you to stay within budget. There’s no precise final price or deadline date though, so you need to keep an eye on both the costs and project progress. T&M also relies on frequent contact between your team and the developers, so you’ll be spending a lot of time in meetings.
Looking To Find A Trusted Tech Partner?
Tech Consulting, End-to-End Product Development, Cloud & DevOps Service! Since 2009, Savvycom has been harnessing digital technologies for the benefit of businesses, mid and large enterprises, and startups across the variety of industries. We can help you to build high-quality software solutions and products as well as deliver a wide range of related professional services.
Savvycom is right where you need. Contact us now for further consultation:
- Phone: +84 24 3202 9222
- Hotline: +1 408 663 8600 (US); +612 8006 1349 (AUS); +84 32 675 2886 (VN)
- Email: [email protected]