Time and material vs fixed-price: which is better for software development

When you enter the cooperation with a software development company, you can choose from numerous project management methodologies to deliver your digital product. The method you should decide on depends on your requirements and various needs (business, users). You can choose from Agile, standard waterfall or you can combine a few – the choice must be simply based on factors defining your future product.

Development methodology has a lot in common with pricing models you will have to choose to make a deal with a software company. Not every pricing model will be suitable for every software development methodology.

From this article, you will get to know the characteristics of each pricing model, and how they should be adapted to different projects, and hence to different project management methods.

What is the fixed-price model…

A fixed-price contract is a type of contract not impacted by the resources and time spent on the project. The client pays one price to get the product done. From this point of view, it’s a straightforward arrangement, easy to understand and deal with.

and what time and material?

The time and material model, in turn, reflects the time and resources consumed by the development team on the project.

The factors understood as spent resources include management staff, time for meetings, workshops, and all other supplies used during the development process.

As clearly visible, each type of contract is based on different principles and must be considered in terms of projects with different needs or requirements. Thankfully, development projects are grounded on similar principles to those in life – the methods of project implementation must be adapted to its needs. Therefore, the pricing model also has to be adjusted to the project.

Which is better: fixed-price vs time and material contract

The most diplomatic answer should be: it depends. And it does, in at least a few cases. In other cases, time and material contract is better. This is of course our opinion but it seems to be shared by other software companies, which results in a definite advantage in using the time and material model.

For those who are not yet experienced in delivering digital products, the way of favorable viewing the time and material contract can be surprising. How is it possible that the pricing model, which assumes so many unknowns (at least at first glance), is better than the one in which the most important aspect, i.e. price, is known from the very beginning? Let’s try to find a clear answer to that.

Fixed-price model advantages, do they really exist?

People tend to think that what is predefined and described is true, and somehow tamed. Well, this isn’t accurate with the fixed-price model. What seems to be obvious is not.

In the fixed-price model, the client buys a product with a known price. Easy, as long as you purchase the already made product and you know what you pay for. However, the software product is usually custom-made and the requirements and challenges come to the surface during the development process. With the fixed-price contract, the price depends on the product requirements, thus they must be defined at the very beginning. And what if the requirements change? Well, the fixed-price stops to be fixed. And what about other „benefits” of fixed-price contracts?

With fixed-price you don’t know exactly how much you spend

In reality, the right pricing – the one which doesn’t change at all, doesn’t exist. Even a very experienced development company can not be 100% sure that the given estimation won’t change. In our several years of experience, there has not been a single fixed-price contract without any changes in the scope of work.

In addition, the fixed-price needs defined requirements, so the software house can estimate the cost of their implementation. Anything not included in the requirements is beyond the scope of work. Naturally, what is out of scope is more expensive. So, if you aren’t sure what your project is exactly, you don’t have detailed specifications, listed features, don’t go into fixed-price agreement because you will pay more.

The second thing that often happens is the situation when the client thinks: ‘of course, I know the scope of my project, so I can go with the fixed-price.’ Unfortunately, reality shows that scope which is supposed to be known and defined is not. Why? As humans, we can not predict everything because technology is far away more complicated than we think. Unless you don’t have many successfully completed projects with a high level of project management and business analytics skills, you won’t be able to set the scope of work that won’t change. Therefore, the fixed price is rarely a more attractive price option.

Changing work scope is a time risk

Also worth having in mind is the fact that discussions about how to treat and estimate out-of-scope requirements impact the delivery time. If the budget issues are not decided, the work has to wait until the cost of the project is set. These facts may be inconvenient but it’s better to be aware of them, so the decision about the pricing model can be made with full awareness of consequences.

Fixed-price needs specification set in stone

How long do you think does it take to prepare a fully comprehensive specification of the requirements and features of your product? Probably a very long time because to get fixed-price (that won’t change) you need to know everything.

If you devote time and energy to create this type of specification, you will be less likely to give it up as the demands change. That can result in sticking with the price you got as fixed at the beginning and launching a product that doesn’t meet the industry standards.

Not necessarily cheaper

First of all, see the above chapter about the changing requirements and think of how it does affect the price. Secondly, most of the development companies add to the fixed-price something as a security amount: 30% + of the whole cost. It happens because fixed-price is a problematic way of pricing, and software companies want to secure the contract against the risk. This is another inconvenient fact with fixed-price but that’s how it works.

Fixed-price means less management time on the client side

This is actually accurate but it doesn’t support delivering the best digital products. The client knows the business needs and has valuable insights which increase the chances of developing a successful product. Running a project based on regular communication and team cooperation is a basis of a high-quality product. Our experience allows us to say it clearly: the more involved client is in the project, the better product development team delivers.

And what about the time and material contract

We already explained that in time and material, the client pays the software house for the time and materials spent to deliver a project. It really makes a deal when you don’t know the whole vision of your product and if you want to cooperate with developers to provide the best possible product. Yes, the time and material model allows you to change and make your requirements better suitable to the evolving vision of your product.

Still, clients are a bit afraid of time and material contracts because they feel, they don’t have control over the budget. Is it the right thing to worry about? Let’s try to debunk the disadvantages of time and material.

Not so expensive as you think

With a fixed-price you know the cost, time, and material, which in turn, doesn’t give you a fixed-price. However, it does give you flexibility and better control over the money spent – you know exactly what a software company does.

Besides, the nature of time and material is closer to the way of working of most software teams. It’s more agile, it allows for developing a custom-made product filled with value. It’s also less risk for the software house, so their hourly rates are more negotiable and less expensive than a fixed-price.

It’s not about the lack of a plan

Time and material contract is not about being unprepared to work on the project. Yes, it needs a plan and requirements but they are more values the product has to provide. Time and material are perfect for agile projects. It’s about bringing value, developing a product that adjusts to its growth. The idea and vision must be set, the business value also, but rest – demands and requirements change the way the product changes.

You know the amount of money spent

With every project you run, you need to know how you are going to track the budget. It is a logical must-have when you decide on outsourcing software. A good approach is to establish at the outset who, how, and how often will be tracking the budget. Talk the topic through with your software development company, and surely you will make a suitable decision.

Tip: Project tasks are always estimated with hours (or in story points), knowing the hourly rate you can estimate cost. Additionally, ask for regular reports on time and money spent on the project. Believe us, controlling the budget with time and material contact is easier than you think. However, it requires your willingness and time.

The client is needed part of a team

Outsourcing software doesn’t mean shifting the burden onto someone else. If you as a client want to develop a digital product you need to be prepared to work and devote your time. Again, in every case we had, the involved and engaged client meant a better product. That is why, time and material are good for agile projects, which get the client used to working together, meetings, and getting involved. Close cooperation with the development team allows you to check if your requirements and needs are fulfilled, and that is something you surely want to achieve.

When to use what

Every project is different, therefore is essential to make a dedicated decision regarding pricing models each time you want to enter the cooperation with the software development company. Although we favor time and material contract, it doesn’t mean that it is always appropriate to use.

When you should choose fixed-price

• when you want to use the traditional project management methodology like a waterfall
• you are 100% sure that the requirements you have listed won’t change
• if your project is small, not complicated, and will be delivered in a short time
• when you don’t have time to work with the team and be involved in project management
• if you have an inflexible, limited budget

When time and material is the best pick

• if your product is based on delivering business value and the requirements flexible support for its delivery
• when the preferred project management methodology is agile
• for long term contracts focused on product improvement
• if you don’t have a strict deadline for project development
• if you want to learn how to manage software projects successfully, gain experience, and have more control over the effects

Conclusions

Time and material vs fixed-price contract is a decision to make if want to develop a digital product. It’s not always easy, therefore you can always try to combine these models. Surely, a software development company will be willing to advise you what kind of hybrid method is possible to implement. However, first, you have to think about what elements of both models will be suitable for your project, so do your homework and think everything through.

Hopefully, this article will support you in making the best decision about which pricing contract to choose. If you are still unsure, we can talk your idea through and help you to make your choice. However, no matter what your decision is, we are waiting for your idea to bring it to life together. Contact us and let’s make some great things together.