Time and Materials vs Fixed Price: Which Fits Your Business?

Money and deadlines are the two aspects that concern entrepreneurs the most when they want to develop an app or a website. This is not surprising, as everyone wants to save money and realize their idea as soon as possible, as time plays against them in the highly competitive IT world.

When searching for developers, the entrepreneurs should pay attention not only to their professional skills, expertise and experience, but also to the pricing contract they use. The early outsourcing contracts were traditionally based on a fixed price model, but nowadays, another business model, time and materials, is widely used.

In this article, we will analyze these two models and explain what advantages and disadvantages each of them has. We will also give an example of a successful project that we have developed using one of the models that has proven to be effective.

Fixed Price Contract

Fixed price model implies that the price is defined in advance and will not be changed until the end of the project. The price is discussed and agreed upon at the beginning of the development process and remains unchanged regardless of the effort and resources spent on the project. At first glance, this model may seem convenient for the customer, as they know exactly how much the project will cost and when they will receive it.

However, this model also has its pitfalls. Yes, customers receive their projects on time and at a fixed price. But can they be sure that these are the final costs and that they won't have to pay again? No, they can't. And here's why! To avoid contractual penalties, a software development company strives to deliver a project on time, sometimes even at the expense of quality. But where quality suffers, various problems with an application or website inevitably arise. To solve these, the customer has to contact the developers again and pay them again. It seems like a vicious circle, doesn't it?

When should a fixed price contract be used?

• When speed of implementation is very important to the customer, and they want to be sure of the exact launch date (for example, for planning an advertising campaign);
• When the customer wants to be sure that the project will not exceed the planned budget;
• For small or urgent projects with strictly limited functionality;
• For MVP (minimum product version) development.

Advantages of Fixed Price Contract

1) Predictable budget

The cost is agreed upon upfront, allowing both the customer and the development team to have a clear understanding of the financial commitment required.

2) Reduced financial risk

With the fixed price contract, the customer bears minimal financial risk. Since the cost is predetermined, the development team is responsible for cost overruns or project delays. This gives the customer some assurance and protects them from unforeseen costs.

3) Reduced customer involvement

In the fixed price contract, the customer's involvement can be relatively low compared to other models. Once the scope and requirements are defined, the development team takes responsibility for the project execution. This can be advantageous for those entrepreneurs who have limited availability or prefer to focus on their main business activities.

4) Simplified project management

The fixed price contracts typically follow a structured project management approach. The development team is responsible for managing the project within the agreed budget and timeline. This can simplify project management for the customer, as they can focus on providing high-level guidance and monitoring progress rather than getting involved in day-to-day activities.

Disadvantages of Fixed Price Contract

1) Possible higher costs

Higher predictability is often associated with a significantly higher price. Put simply, sellers must anticipate all future costs, which carries considerable risk on their part. As a result, they charge more for projects as a precautionary measure. This is why fixed-price projects can sometimes end up costing the entrepreneurs much more than expected.

2) Limited flexibility

The fixed price model is based on the assumption that the project requirements are well-defined and unlikely to change much. However, in the real world of software development, requirements always change as the project progresses or new information becomes available. In the fixed price contract, accounting for changes may be difficult, resulting in additional costs or trade-offs in scope.

3) Scope creep challenges

Scope creep refers to the tendency for project requirements to exceed the scope of the original agreement. In fixed price contracts, it can be a challenge to manage scope creep, as additional work beyond the agreed scope may not be included in the original price, leading to disputes and potential cost overruns.

4) Quality trade-offs

In the fixed price projects, the development team may be under pressure to meet the agreed budget and deadlines. As a result, the team may be forced to shorten deadlines, skip some quality assurance activities, or rush through testing.

Time and Materials Contract

The time and material pricing is opposed to the fixed price contract. This includes the calculation of development service costs, taking into account the hours worked by specialists, as well as the utilization of all resources and materials. This is how it works:

• The development team divides the project into tasks and evaluates each task separately, so that the customer has the opportunity to make additions and clarifications as the work progresses;
• The developers evaluate the first task and provide the customer with the number of hours required to complete it;
• The number of hours is then multiplied by the developer's rate and the cost of the task is obtained. If the customer agrees, the development team starts working;
• When the task is completed and the customer gets visible results, they pay for the team's work. Payment can be made before the sprint or after it. It all depends on the agreements between the customer and the contractor.

What kind of projects is the time and material pricing suitable for?

• For projects in the process of development or with unclearly formed requirements;
• For sites with complex logic;
• For complex corporate sites;
• When the customer needs to realize several parts of the project at different times.

Advantages of Time and Materials Contract

1) Flexibility and adaptability

The time and material pricing model is well suited to projects with changing requirements or high levels of uncertainty. It provides the flexibility to accommodate changes as the project progresses. Customers can adjust scope, features or priorities based on feedback and emerging needs, allowing for greater adaptability throughout the development process.

2) Transparent costing

With the time and materials contract, the cost is based on the actual time and resources spent on the project. This transparency allows clients to have a clear understanding of the cost breakdown and how their investment is allocated.

3) Continuous collaboration

Customers have the opportunity to provide ongoing feedback, review work in progress, and actively participate in decision-making throughout the project. This collaboration fosters a better understanding of the customer's needs and promotes a sense of partnership.

4) Enhanced quality assurance

The time and materials contract provides flexibility to allocate time and resources for proper quality assurance activities. The development team can dedicate sufficient effort to testing, code review, and other quality control measures without the constraint of a fixed budget. This can result in higher-quality deliverables and a more robust end product.

Disadvantages of Time and Material Contract

1) Uncertain project cost

In the time and materials contract, project cost is directly related to time and resource costs. This means that the final cost of the project may not be known in advance, making budgeting and financial planning difficult.

2) Limited cost control

If the development process encounters unexpected delays, inefficiencies, or scope changes, the cost of the project can increase significantly.

3) Timeline uncertainty

With the time and material model, the customer often has the flexibility to make changes during the development process. While this flexibility can be beneficial, it also increases the risk of scope creep. Any adjustments and changes made to the project during the development process can also delay the final release date.

4) Complex project management

Time and materials contract often requires the active involvement of the customer, especially in terms of project management and decision-making. This can be a disadvantage for those customers who are limited in time or do not have the necessary expertise to effectively manage the development process.