Time-and-Materials vs Fixed Price: Which to Choose for Your Project? by Yevheniia Korotia

You pay the cost in installments as the project unfolds, with the payment schedule usually dictated by the project’s milestones and duration. 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.

This model doesn’t provide the precision of the fixed price — both parties have a right to offer new conditions as the project moves along. A product owner can suggest adding new features or removing the ones that were discussed beforehand. The development team updates the client on the progress, forecasts the process, and continuously looks for cost reduction methods. 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. For example, you cannot agree with a contractor on a cost plus fixed fee contract to pay his actual labor costs plus a predetermined (fixed) overhead rate.

Good Product Thinking

Below, I structure the information we usually discuss with ScienceSoft’s customers to help them decide on the outsourcing payment model. You are welcome to apply it to your project as well as to make a choice. At its core, the fixed-price model relies on predictability and precision. The project’s scope is meticulously outlined, and a specific cost is agreed upon upfront. You agree on the price, you set the scope of work, and you’re all set. All the cons and risks might be caused by the fact that this type of contract is highly flexible.

The fixed-price model ensures that a project is done and delivered within a specific timeframe and budget. In one of our blog posts, we discuss the flaws of the Fixed Price model, which is basically a one-time cost before the project starts. Then, the software development company needs to distribute this money to achieve the goal and cover the expenses. This can be problematic in our fast-paced world, where everything can change within the timeframe of the project.

Fixed-Price Contracts vs. Time and Materials (T&M) Contracts

Also, this contracting system is perfectly compatible with Agile sprints — the project is broken into separate stages with reviewing, testing, building, designing, and planning. In this post, we’ll review the two most common cooperation modes. We’ll review these strategies individually and later compare the respective benefits and disadvantages.

However, the fixed-price model can be unforgiving when the unexpected arises. There can be disputes, change orders, and delays, which can strain relationships between clients and contractors. That’s how the fixed-price model works – you settle an agreement for a specific outcome that needs to be delivered on a predetermined date. But here, you also agree that you won’t introduce any changes in the project throughout the cooperation.

And as you keep testing and optimizing useful features, you may end up spending less money than a developer would have quoted for a fixed price agreement. With a fixed price contract, you have a fixed scope, fixed budget and fixed time. It’s simply a set-and-forget model where you agree on a price and expect the job to be delivered. It may work for other services where the outcome is specific and predictable.

It helps you not to overdesign or overpay your developer for things that don’t work with your users. And this can mess up everything, forcing you back to the drawing board. Additionally, the developer needs to be okay with your budget and scope.

Fixed price works better for short-term goals — it’s convenient, clear, and reliable. With short projects, you see the end goal, and devising a strategy shouldn’t be a problem. However, trying to estimate a complex project in detail from the very beginning, will simply lead to misunderstanding https://www.globalcloudteam.com/ and delay the start of the project. Also, there is a huge risk of having to redo certain aspects, because a team overlooked some technical issues or fail to optimize the requirements. Fixed price can be used for quick fixes and patches, but it’s a solution for long-term projects.

Outsourcing and outstaffing are widely adopted and recognized practices. By using them, you can improve development, reduce costs, and benefit from the expertise of highly skilled IT professionals. Now stakeholders value flexibility just as much as they appreciate predictability — it’s important to have a right to make new executive decisions as development progresses.

• Below, I structure the information we usually discuss with ScienceSoft’s customers to help them decide on the outsourcing payment model.
• Two weeks pass, and you start thinking that maybe that classic suit wasn’t such a great choice after all.
• 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.
• Now that you have a clear idea of how the difference of fixed price vs time and materials, let’s talk about practical insights.
• The CPPC type of contract is prohibited and cannot be used when Federal funds are involved.

And still, we might not avoid some communication misunderstandings while the project is ongoing. You can start with the idea and keep developing it with the team overtime. This helps you to deliver the MVP to users faster and get feedback on its value.

On the other hand, the lack of communication can drag the project on. With proper planning, however, time and materials is the most viable model for long-term projects. Despite its numerous pros, fixed price is by no means a perfect cooperation system. When a business owner and development team try to estimate the project’s progress early on, crucial details get overlooked — and it might have disastrous consequences for the end product.

They should also make decisions during the process of development, while the work is ongoing. This way, they can respond accordingly to the needs and pains of their target group that can evolve at any minute. Two bold lines represent the synergy of client and company, with dual perspectives merging together.

When you are faced with restrictions you want to prioritize clarity over flexibility. If you want to verify your decision with an outsourced development provider and discuss related outsourcing opportunities, you can always get in touch with ScienceSoft’ team. Lots of startups will benefit from the early start of the project.

Typically, if a client and development team is bringing new technology to the market, they might overlook a potential risk or a cheaper solution that might present later on. Time and materials formula takes these unforeseen events into account. Time and materials pricing uses hourly rates as a billing basis. Here, the development team does an estimate of the work scope based on hour count and provides the hourly rate for a particular service. The additional report covers the cost of materials — tools, hardware, additional expenses. This is because the T&M contract has no incentive for the contractor to control costs – the more time and money spent, the more profitable it is for the contractor.