Fixed Fee vs. Time and Materials: What’s the Difference, and What to Look For
Sometimes, you need more than buying an off-the-shelf solution for your business. You need to make sure it works with your tech stack or you’ll have problems. There are limited options on the market, and you need software built from scratch. In order to streamline your work, you have decided to hire a software development company to build the tool. You’ve prepared a list of requirements for your solution and picked a company, so now all that’s left is to arrange a meeting with them.
Now let’s talk about something important – picking a cooperation model. If you choose the wrong type of contract for your business, you can be stuck with a rushed or unfinished product, going way over budget, and more. Therefore, you must think carefully about which type of contract best suits your needs.
At Agilistry, we offer two different cooperation models:
- Time & Material
Which of these two contract types will be best for you? You’re in the right place. To help you make that choice, we’ll look at what each type of contract offers.
What is the Fixed-Price model?
Fixed-price cooperation is a straightforward business model. You pay the developing company a lump sum of money, and you get specific results delivered in exchange. It’a popular cooperation models because it makes companies feel safe and secure. After all, they have a set budget they can count on not to exceed. This cooperation model sounds attractive if you must strictly plan your budget and expenses.
There’s a deadline by which the client is guaranteed to receive a finished product, and milestones make it easy to track your progress. This model might be just what you need if you have a fixed-price project with few risks and clearly defined features.
Disadvantages of the Fixed-Price Model
One thing you may discover during your project is that you don’t need one of the features you identified in the contract, but you do need a different one. You also need a newer API version and support for the new system. If you’re working with a Fixed-Price cooperation model and want to make adjustments like these, additional procedures and formal flows are usually required. This can be justified by more significant changes. Still, minor adjustments might make the work much more expensive because each task that only takes a developer a few hours has first to be discussed with management. Risk assessments, quality assurance, a code review and deployment must all be completed. This means paperwork will increase, which will add to your budget and delay the project.
When choosing a fixed-time contract, schedule a meeting with the development team first. Get all project specifications clear—to both you and the developer—and plan down to the finest details. Discuss all possible actions that the development team should take, along with risks and pitfalls. Otherwise, the final product might not be exactly what you hoped it would be.
When Should You Choose a Fixed-Price Contract?
- It’s a small or medium-sized project that can be easily developed or an MVP
- You have clearly defined your needs and deliverables to the developers – in other words, you can tell them what they need to build.
- The project requirements are unlikely to change
- Your budget for the project is limited, and you need to get the budget approved first.
- You are interested in the deliverables of a project rather than the time it takes to complete it.
What is the Time & Material model?
Time and Material is different from Fixed-Price. Under Time and Material, rather than pay a set amount right at the start, you pay the software team for the work hours needed to finish a given project and for all the materials they use. This type of cooperation model works well for projects that are too unpredictable to allow for accurate estimates, where there is no set price or rigid deadlines for the team.
The T&M cooperation model is superior to the fixed-price model when you need more control over a project. With this model, you can change elements of the project when needed and still receive detailed visions of the product as a whole.
So how does it work? With our approach to software development, your project will be divided into smaller tasks that each has an estimated time, workforce, and cost. Our development team will start working on your project once you agree to our quote. During the project, you will have several opportunities to suggest changes and make modifications. At the end of the project, you will receive a high-quality product that meets your needs.
Disadvantages of Time and Material Model
The budget is one of the main things to worry about when planning a project. However, with our experienced team, you can define the cost of a project before starting it and manage your budget as the project progresses.
It might be harder to keep track of the project’s progress. A fixed price model allows you to leave all of the work to the developers, but Time and Material requires constant supervision of task progress, materials used, and budget spent. Monitoring is critical since there’s no definite deadline in the contract, and you want to avoid a six-month project turning into a year. You should also remember that unless there’s some bonus in the contract to be paid if the development team finishes ahead of schedule, they have little incentive to complete the project early.
We work closely with our clients to avoid such shortcomings.
When Should You Choose a T&M Model?
- It’s a complex or long-term project
- You don’t know the full extent of the product.
- Requirements are likely to change.
- You want to take ownership of your product’s development and make decisions related to it.
- You need to be as flexible as possible.
Both types of contracts have their advantages and drawbacks, so each one is best for different types of projects. A Fixed-Price contract is best if you have a small project with detailed guidelines or when you are sure that no changes will be needed. You will know the cost of the product in advance, and you will receive it on time. However, you need to be prepared for unexpected issues or errors arising that might either postpone the deadline, result in additional costs or leave you with an unfinished product.
For larger or longer-term projects, we recommend a Time and Material contract. It provides flexibility and control of product creation, while also helping you stay within budget. There’s no exact final price or deadline date, so you should keep an eye on both costs and project progress. T&M relies on frequent contact between your team and developers, so expect to spend much time in meetings.
If you still need to decide which project model would be best for you, we’re here to help. Contact us today, and we’ll help you find the collaboration model that will enable you to reach your goals.