Time and Materials vs. Fixed Price | Pros & Cons for Business Owners
Time and Materials vs. Fixed Price – how to choose a software development pricing model for your project? Check out an in-depth comparison for app owners.
In our previous article about three software development pricing models, we compared several popular software pricing models on the market today, together with their different variants.
Today, we’d like to focus on the two most widespread ones: Time and Materials vs. Fixed Price model.
In our experience, clients choose between these two models most of the time. They’re the two most popular models for pricing software development today, which at the same time differ in many aspects. Each of them has its own characteristic benefits and drawbacks. They also match completely different projects.
If you’re trying to choose between these models, this article is for you.
Read on to find out everything you need to know before you start negotiating with a software development company that will be responsible for realizing your project.
Time & Materials and Fixed Price contracts in software development – introduction
Before we begin our comparison – Time and Materials vs. Fixed Price – here’s a quick recap of the basics about the two pricing models.
What is the Time and Materials model?
Time and Materials (aka T&M) is a standard phrase for a (software) product development contract. In this model, you pay for the actual time the team spent on developing your product, together with the cost of all the materials and equipment used in the process. Time and Materials is generally used in projects where it is not possible to accurately estimate their size, and requirements are dynamic.
The model requires careful estimation of the time, scope, and budget – but these values are still flexible and can be agreed upon on a regular basis during the development process. If you choose this contract, you’ll be settling payments within the previous-agreed intervals – for instance, on a monthly basis.
T&M stands in opposition to the Fixed Price contract.
What is the Fixed Price model?
In the Fixed Price model, you agree to pay the provider a lump sum for concrete project scope, no matter how many hours the team actually spends working on the product and the other costs the provider bears in the process.
As a Product Owner, you develop a detailed project specification the provider uses to develop cost and time estimates. Both elements are fixed in this model, meaning that the development team commits to delivering the project within the set deadlines and budget.
Software development companies often create a project roadmap with internal deadlines and milestones, which then serve as the payment schedule.
Time and Materials vs Fixed Price – a quick comparison
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See below how software development companies address these risks.
Time and Materials vs. Fixed Price – advantages and disadvantages
Now that you know what these two pricing models are all about, let’s take a closer look at their respective advantages and potential drawbacks for outsourcing software development.
Time and Materials advantages
You save time on the initial estimation
The Time and Materials model will help you save time on the process of defining the initial estimations of your product. Instead of investing time into writing detailed product specifications, you can start working on your product sooner and accelerate its time-to-market.
Flexible scope & changes
The Time and Materials model allows for greater flexibility in terms of the project’s scope. Even if you start your project without a definitive plan for how it will be completed, this pricing model allows you to progress the project and quickly respond to changes on the market.
Once you release your MVP and gather user feedback, working in the model will allow you to flexibly change the project’s scope on the basis of the insights you acquire.
Transparent development process
This model also provides you with full cost and project progress transparency. As an engaged Product Owner, you’ll know what team is up to and can verify documents such as invoices and timesheets to make sure that the calculations are correct. A professional software development company will share this documentation with you, and it won’t have you guessing where your money is flowing.
Control and influence over the product & team
The Time and Materials model allows you to become part of the development process, monitor the work of the team on a regular basis, and participate in team meetings. That way, you can ensure that the work in progress matches your desired quality and have more control over the project’s overall direction.
Control over quality
Since you’ll be an active participant in the development process, you’ll have included over the development of your product. You will have the opportunity of introducing flexible changes that will translate into superior quality.
Time and Materials – common fears
Some business owners hesitate before choosing this model for several reasons. However, many of these doubts turn out to be unfounded. And the real ones can be handled with the help of special tools that eliminate these issues.
Lack of control over the budget
You might be worried that leaving the budget flexible will mean that the costs of your project will rise uncontrollably. Or that your budget will run out before you complete the project.
But experienced providers will offer you tools for monitoring the process and controlling the cost of development. At Droids On Roids, we use several tactics to make our clients feel in control:
- Report of completed work delivered after each Scrum sprint,
- Using time tracking tools for greater transparency – they show how much time every team member spent on which task,
- Forecast and change management plan (the team forecasts the project budget and supports PO in its monitoring; the team predicts potential risks so they can be prevented),
- PO takes part in regular Scrum meetings,
- PO has direct contact with the development team and each team member.
Thanks to this set of elements, you get to see where your money is flowing, how much of the budget has been spent and how much you’ve got left. Also, you can see future forecasts and react accordingly if something isn’t working for you.
Make sure that your contract with the software development company includes them. What else should you check in your contract? Learn more about the key things you should check in a contract with a software development company.
Another common fear of choosing this pricing model is that you’re leaving the development team to its own devices. And that creates a host of serious communication risks.
At Droids On Roids, we deal with this issue by offering our clients the following:
- The Scrum framework and its set of regular meetings,
- Direct contact with the team members,
- Use of helpful tools like Slack (if the client doesn’t know them, we’re introducing all the tools the team will be sung throughout the development process),
- A kick-off meeting that allows our clients to get to know the team better (and vice versa). Read more about the value and practicalities of kick-off meetings.
Fixed Price advantages
No surprises when it comes to the budget
This model guarantees that the final price of the delivered services isn’t going to change. The price is written into the contract and fixed. You’ll know exactly how much your project will cost and make sure that there are no extra expenses charged at the end.
But if locked by the constraints of a fixed budget and facing unforeseen complications, the development team might look for shortcuts and, as a result, deliver a solution of sub-par quality. As a result, you might have to spend more money on fixing issues once the project is finished.
You don’t have to engage in the project during its development
Since this pricing model doesn’t require your participation or control at every stage of development, you save a lot of time, which you can use instead to concentrate on growing your business. All the while, your project will be proceeding according to the direction you’ve set for it. However, this also means that there’s no one around to control the quality of the delivered work.
Fixed Price disadvantages
Predicting all the requirements is possible in rare cases
You may have a clear vision of how the final result should look like. You know how to describe what you need to be done in technical terms. But that’s not enough.
In fact, a theory is always less accurate and predictable than empirical experience. The best ideas for improving your product might evolve during the development process. But if you’ve chosen the Fixed Price contract, applying changes will be hard. You’ll need to issue a change requires and ask the team for reestimation. This will slow you down every single time you want to make a change.
In short, the Fixed Price model isn’t designed for changes. But since we live in a world that is constantly changing, your product development needs to embrace that – and that’s challenging within the Fixed Price model.
No possibility of flexible changes
This model doesn’t support changes efficiently. If you’d like to change something in the project once it has been started, you’ll face potential costs and your time-to-market will become longer if you decide to implement these alterations.
Limited control over the quality
In this model, the development team is locked in a fixed budget. If something goes wrong in the project, the team will have limited space and funds to address the issue. As a result, developers might start looking for shortcuts and build a low-quality solution.
Not a good fit for complex software products
The only projects that can benefit from the Fixed Price model are ones that are small and relatively simple – in some cases, that could be a Minimum Viable Product. If you’re able to develop accurate requirements and know that the project isn’t going to require any changes in the near future, this model is for you.
However, projects lasting more than two months will benefit more from other models. This pricing model won’t satisfy the demands of large-scale projects that require building complex features and implementing many components.
Time and Materials vs. Fixed Price contract – summary
Choosing the right pricing model is essential for the quality of collaboration with your provider, as well as the success of your product. Your choice ultimately depends on the type of project you’re looking to develop. We hope that this guide comparing Time and Materials vs. Fixed Price model, helps you to pick the pricing model that offers the greatest number of advantages for your project.