Fixed price vs Time & Materials: Which works best for your project?
Let’s face it - initial agreements for remote work were traditionally built according to fixed-price model. However, another more flexible business model has recently come into usage. Digital agencies call it mainly Time & Materials. Selecting the right pricing model is a challenging task for a customer, that is why a tech expert’s opinion may come in handy. Everything - from general requirements quality to company’s best practices is essential while choosing a payment model.
In this article we are revealing what is hidden behind these two types of contract.
When fixed-price contract is appropriate for you
Fixed-price or fixed-bid agreement is a contract with a presupposed budget, clear requirements and an agreed delivery plan. No further clarifications or change requests are made within the course of the project. In short, service provider is responsible for completing the project within the agreed sum and timeframe set out in a bond. A fixed-cost contract is a right choice for a short-term project (1-2 months), or for an MVP when a customer wants to test the water within a new business strategy.
Very often it is important to choose a Product Owner among the vendor’s team. This member is the one who cares about following the customer’s vision of the product and keeps an eye on the priorities being respected.
Ask for a fixed-cost contract when:
- you are sure to have clear requirements and mockups or your service provider can develop them;
- the team is not important, but the project delivery is;
- you want an MVP without bells & whistles;
- you want to add new features to your existing product.
3 highly important documents before the start:
- Mockups of UI/UX design
- Acceptance criteria (definition of a ready product)
Even though the delivery plan is agreed and the schedule is set, some third-party services, or APIs, may influence the date of launch. Kindly consider this fact which cannot be handled solely by software development partners.
When T&M contract will serve your needs better
Time and material (T&M) contract has absolutely different purposes. It presupposes invoicing customers for actual work scope based on an agreed hourly rate. With this method you will be sure that you invest every minute into someone you know the skills of. The main advantage of T&M model is flexibility and opportunity to adjust requirements to business trends, replace features and shift focuses.
Ask for a Time & Materials contract when:
- you want to speak with a team and change priorities on a daily basis;
- the project is large (2 months and more);
- the scope is poorly defined and likely to keep modifying;
- you want a fixed and dedicated team to work on your project;
- you want flexibility to influence the scope, workloads and team members;
- you may want to freeze a project for some time, and get back to it later, or refocus your attention to other projects.
No more options?
The above mentioned software development pricing models are the most common and time-proven. However, it is worth mentioning that we at IT Master have good practice of applying their combinations when circumstances oblige us to do so. As the saying goes, FLEXIBILITY IS THE NEW KING.
What if you:
have a fixed budget but requirements are not ready? don’t plan to realize a full project but would like to give tasks from time to time and not to exceed your monthly budget? want to create a demo version of a product to attract more investors, but you lack resources?
There are lots of cases we have successfully come through together with our partners. Ask for a bid, explain your unique situation and you will get a personalised recommendation from our Business Analysts.
Every price model works effectively in skilled manager’s hands. In any case you are to choose. We at IT Master sincerely hope that these recommendations will assist you in this challenging task of coming to the right agreement with your vendor.