Time and Material vs Fixed Price: Which Pricing Model is Better?

We at JustCoded have tried both pricing frameworks and can tell you about their pros and cons from our own experience. 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. Before we even start comparing those two types of contracts, we need to establish their characteristics. David Usifo is a certified project manager professional, professional Scrum Master, and a BCS certified Business Analyst with a background in web development and database management.

Adding, removing and improving every feature to get the viable effect is not a problem if the client has a budget. The best option if we can’t estimate exactly how much the project will consume time and resources. It also comes in handy when we can’t predict if the project will change over time – or we assume it definitely will do that. Fixed price contracts are typically easier to administer than T&M contracts. You don’t need complex time tracking and invoicing making the procurement process much simpler. Fixed price contracts include delivery date commitments holding the provider accountable to preset schedules.

When can you safely choose a Fixed-Price contract?

When comparing time and materials contract vs. fixed price, the former is considered more flexible as it allows you to base your budget on ongoing labor costs. What this means is that you get to pay for the actual time and effort spent on implementing the software development project. Customers should choose a pricing model based on the type of project they have.

You only pay for the work already completed up to the termination date. This is beneficial for projects where requirements are likely to change or remain uncertain when development starts. Thus, fixed-price contracts work best when requirements are clearly defined upfront.

It’s predictable

With Milestone pricing, the customer is billed when a service provider has implemented a specific scope of work over a certain period of time, achieving a predefined milestone. At that point, the client needs to pay the service provider an amount that depends on the time spent and the things achieved for the given milestone. After negotiating the details, both parties sign the fixed price agreement. This locks in the project pricing, and sets out an overall budget, payment terms, project timeline, and other contracted deliverables. The client and contractor agree on hourly rates for personnel based on role, skillset, and experience. Common ranges are $50-$150/hour for developers, $75-$200 for consultants, etc.
At Orangesoft, we can help you identify your pain points and write a detailed project specification, and then we develop cost and time estimates based on those specifications. When you compare dedicated teams and time & materials in terms of costs, both models can be relatively affordable. For instance, clients pay upfront costs at fixed price, making sure the budget is fixed unless critical changes are going to be made in the future. In dedicated teams, you can also save costs because the service company takes a custom approach to your projects by hiring talents that are within your budget. The risks involved in dedicated team vs time and material cooperation models are typical.

Alternatively, you can talk to us, and our experts will suggest the best approach. There are various perspectives to take into account when assessing flexibility in software development. For example, does your internal team have a clear vision of the end product? What are the other requirements that you would want to implement during the development process? Answering these questions will help you gauge the kind of flexibility that your project needs; hence the ideal engagement model.

If the budget needs to change, Scalac reports this as soon as possible and reacts on-the-fly to the client’s decisions. This model is the most collaborative and provides the greatest value to the client. Before choosing a fixed-time contract you need to schedule a meeting with the development team first, during which you will discuss all of the project specifications. These must be crystal clear to both you and the developer, so you need to plan down to the finest details.

Let’s find out what are their pros and cons and who can benefit from each. With open communication and collaboration, you can have a successful project using either approach. Carefully assess which pricing model aligns with your priorities and mitigates your risks. T&M contracts offer flexibility as project specifications evolve, while fixed-fee contracts provide cost predictability.
Given that fixed-price contracts don’t imply any alterations or delays, you can protect yourself from unpaid hours by creating a buffer cost. Management of a fixed-price project aligns with the waterfall paradigm where the development process goes through several predefined stages with little chances for adjustments. As the name suggests, with a firm-fixed-price contract (FFP) you pay a set sum of money for a particular scope of work that will bring expected deliverables. Initially, we built relationships with our clients on fixed-price contracts, but now we rely on the T&M pricing.

• This is exactly how Fixed-Price cooperation models work – it’s all pretty straightforward when it comes to simple products.
• The time & materials model involves regularly paying for work completed.
• The Time and Material model works on a completely different principle than the Fixed-Price model.
• Yes, a time and materials (T&M) contract can be seen as a hybrid of cost-reimbursable and fixed price contracts.
• A major difference between the two contract types is the flexibility to change requirements after the project starts.

In the grand tapestry of project dynamics, the choice between fixed fee and time and materials models isn’t a one-size-fits-all decision. Rather, it’s an intricate dance of factors that are woven together with your project’s unique contours, goals, and adaptability demands. The Time and Materials model is characterized by its flexibility and adaptability. In this approach, the client pays for the actual hours worked by the development team and the materials used during the project’s lifecycle. T&M is particularly suited for projects with evolving requirements, where changes and adjustments are expected as the project progresses. This model provides the freedom to accommodate modifications and enhancements without the need for renegotiation.

If they have a clear understanding of their project and a limited budget, then a fixed-price model should be used. Clients should avoid including lots of functionality in this case and instead focus only on core features. If the project is quite flexible and requirements change frequently, then the time & materials model should be applied. When the parties have a long-term and trusting relationship, they can work according to the milestone model. In a nutshell, customers must balance their expectations of quality, deadlines, and price.
Flexible models may be hard to manage and control as they require permanent involvement and solid managerial skills. Sprints are short, easily manageable, and more effective when it comes to monitoring the whole development process. Also, in Agile, testers and developers collaborate very closely as error fixing happens immediately after bugs are detected.
You also need a newer version of API, and support for the new system. With a Fixed-Price cooperation model, changing the scope of work requires additional procedures and usually the formal flow too. For bigger changes this is justifiable, but for small adjustments the overhead on the formal flow makes the work much more expensive.

At the core of this approach is a steadfast commitment to the business impact generated by project implementation, irrespective of initial assumptions. Instead of being the sole source of wisdom, analysis evolves into the project’s framework, https://www.globalcloudteam.com/ offering room for ongoing shaping. The ability to influence the project’s trajectory remains at your fingertips. Sometimes, the optimal solution isn’t an either-or choice – it’s a harmonious blend of strategies, the hybrid model.