When hiring a team of developers, a product owner comes across various pricing models, each with its benefits and drawbacks. Without a doubt, both sides have an interest in picking the most suitable and beneficial type of cooperation. Chances are, you have heard about the two widely-used software development pricing models, time-and-material and fixed price. And now you are at the crossroads: you need to decide which outsourcing agreement is better for your company. Of course, it would be so much easier if all the decisions could be made by tossing a coin, wouldn’t it? But let’s be realistic, this is the case when weighing all pros and cons is a must. To help you make the right choice, we have prepared this informative article. Everything you need to know about Time-and-Materials vs Fixed Price patterns is here.
A Few Words about Time-and-Material vs Fixed Price Models
Even though a lot of companies often combine the two models creating unique agreements, we suggest that you read some general info about each to have a better understanding of what time-and-material and fixed-price contracts are.
When it comes to software development, there are a couple of questions every customer asks their contractor first. They are the following:
- How much will a project cost?
- How long will it take to make an app like the one I want?
- What results should I expect?
Let’s see if the fixed price and time-and-material pricing frameworks can give answers to each of the questions.
What is a Fixed Price Agreement?
As one can tell from the name, a fixed-price model (also known as a firm-fixed-price model) stands for a type of contract in which both sides a client and a vendor agree on the scope of work, the deadlines, and the amount of money needed for the project implementation before the process of development starts.
A fixed-price contract can be paid one time or in several payments during a pre-agreed time frame. Even though the scope of work is fixed, there’s a decent chance that you might need to implement some additional features along the way. This may result in shifting the deadlines and increasing the costs.
What Does a Time-and-Materials Contract Mean?
A time-and-material contract, as opposed to a fixed price type, offers more flexibility in terms of development time frames and budget required. Within this billing model, a client pays for the actual scope of work that is done by a services vendor. The price is formed from the amount of time a team of developers has spent on a particular project and the costs of materials used. The hourly labor rates are agreed upon by a client and a contractor beforehand. As for the payment intervals, they are also flexible and negotiated in advance.
Paying for software development isn’t the same as buying products in a grocery shop. A project tends to change and grow which often requires more time and expenses. That’s why most would agree that a time-and-material model is better compared to a fixed price framework.
The Advantages and Disadvantages of Each Type of Billing
There is no perfect solution. Both pricing formulas have their benefits and drawbacks. Let’s have a closer look at them.
Time-and-Material Model Pros
- 100% flexibility. Thanks to the usage of the Agile method, it is possible to make instant changes within a project when they are needed. T&M contracts allow a client-company to modify features, change the scope of work, accommodate different designs or amend materials.
- You save your time. There’s no need to spend a great deal of time on thorough planning since most of the tasks are determined during the development process. By signing a T&M contract, developers can start working immediately.
- Hourly labor costs ensure the efficiency of performance. Besides, you can monitor how much time a team spends on a particular task.
- The dynamic workflow. An opportunity to make decisions during a development process and improve a strategy is beneficial for big-scale and middle projects from the perspective of the expected outcomes.
Time-and-Material Model Cons
- The budget isn’t defined in advance. There is always a chance of increasing expenses during the period of development.
- Unclear time-limits. Within time and material pricing system, there are tons of factors that can shift the release date.
- Constant communication with developers and full involvement in the workflow. Even though it may seem like a plus for some, most customers find daily reports, planning and meeting tiring.
What projects will benefit from the Time-and-Material contract?
Let’s now have a quick look at what projects can be completed within the time and material model:
- Large-scale projects that require a lot of time for their implementation. It won’t be a big surprise that it is almost impossible to plan everything out to the tiniest detail, especially when it comes to long-term projects. Thus, T&M is a win-win option because it allows developers to make changes and do what is best for a project on a particular stage of development.
- The same can be said about complex projects. There’s no way for clients and vendors to work out complete specification documents. Hence, an opportunity to make timely corrections and include additional features is quite beneficial.
Fixed Price Model Pros
- Defined deadlines. A client receives a ready product on time.
- A fixed price, which means there won’t be any additional expenses out of nowhere.
- Clarity and simplicity of management. It is easy to predict every step of the development process since everything is planned out upfront.
- Well-stated requirements and an ability to foresee possible outcomes.
- Minimal risks for a client. As a customer, you don’t need to worry about deadlines or extra fees.
Fixed Price Model Cons
Setting a fixed price looks like a perfect option at first. However, it is not all rosy as it may seem.
- Little to no flexibility. While some may think of it as a plus, being unable to make changes and improvements is definitely a drawback of a fixed-fee agreement.
- The stage of planning takes a lot of time. A development team and a customer can spend a substantial amount of work-hours on planning everything in detail.
- Fewer interactions between a customer and a vendor during a software development process may result in misunderstandings. However, it doesn’t mean that you will be completely unaware of what is going on with a project.
What projects will benefit from the Fixed Price contract?
To help you decide whether the fixed price pricing formula fits you, we suggest that you determine the size of your project first. Fixed-price contracts are most appropriate for projects like these:
- Small projects that have just a few basic features and require little time for their implementation.
- MVPs (minimum viable products). In case your goal is to build MVP for an application first, a fixed price model is a good option.
- Projects that require tight deadlines.
- Projects with a set of predetermined features that definitely won’t need to be changed in the future.
So, answering the question, “Which pricing model is better, time-and-materials vs fixed price?”, we’d say, “The T&M contract is slightly ahead of the fixed price system due to the flexibility it offers”. Nevertheless, they both are good. If you have a small-scale project, tight deadlines and/ or an MVP, the fixed-price pricing pattern will fit the bill. On the other hand, if your project is quite big and complex and you need more flexibility when deciding on features and so on, it will be better to choose the time and material.
We at Yojji have had the experience of working with both fixed-price and time-and-material pricing models. Due to this, we consider ourselves competent enough to compare the two pricing frameworks and give you pieces of advice regarding which one to go with. Frankly, we are used to working within the T&M model. However, if a project requires a different approach, the fixed-price agreement isn’t off the table. Let’s say, you need to build an MVP for an application. To kick-off, we can go with a Fixed Price. Later on, if you find the result of our work satisfying and you need to create a fully-fledged and feature-rich app, we can shift to a Time-and-Material type of billing.
Feel free to get in touch with us if you have any questions.