Software Development Pricing Models: Time-and-Materials vs Fixed Price
Time-and-Materials vs Fixed Price: Which One to Choose?
Usually when speaking about outsourcing IT services and their costs the dilemma of choosing one among all available software development pricing models arises. Both clients and contractors have to decide whether it will be a Time-and-Materials pricing contract or a Fixed Price contract. So which pricing model may be the most beneficial for both a client and a service provider? To answer this challenging question let’s look precisely at advantages and disadvantages of both software development pricing models.
Software Development Pricing Models: Time-and-Materials
- Approximate time estimate
- Possibility of adding changes on the go
- Payment depends on the hours spent
In reality, only a few clients have a clear understanding of the product they need at the very beginning. After the project kick-off, a client’s business perception is gradually fusing together with the technological expertise of a development team. As a result, both sides get a deeper vision of a product. For that reason, clients may change the initial requirements and improve some features on the go. Software development service providers move step by step and let clients share their new ideas. Working on Time-and-Materials basis is thus more flexible. Under Time-and-Materials contract a client can be 100% sure he gets the solution fully corresponding his expectations. Following this pricing model, a client has a total control over both the deliverables and the budget.
The service provider is being billed per hour regardless of the software development project duration. If the client wants a development of any additional features the contractor is being billed just for the time spent by its employees working on a certain set of tasks. The main advantage for clients is that using Time-and-Materials contract type their evolving requirements easily impact and adjust the whole contractor’s workflow. The flexibility with Time-and-Materials contract is unlimited. On top of that, using this but no else software development pricing models a client can rest assured that he gets a high quality and well-tested product.
If a software development service provider sets its hourly rate according to its internal calculations it may be losing additional profits. Why? Because they may set their price lower than the average market rate. Also one of the disadvantages is that some clients may ask for reductions on a contractor’s hourly rate. This may lead to profit loss for a software development service provider too. For a client the disadvantage may lie in a contractor’s temptation to run up a defined timeline in order to increase its software development billed hours. However, the client is keeping track of the contractor’s actions and is fully aware of the process. So the mentioned risk is rather theoretical than practical.
Common Cases to Use Time-and-Materials Contract:
#1 – Not enough data to estimate the project correctly
Time-and-Materials software development pricing model assumes that client accepts the risk of insufficient data. Often when providing the contractor with the data for migration and improvement the client doesn’t understand that their data may not actually be clean to proceed with it. Thus Time-and-Materials contract includes this risk and the contractor is able to normalize the client’s initial data at additional cost.
#2 – The client wants to be involved in the project somehow
In projects where the client provides some developers or when another business is involved on the client’s side Time-and-Materials contract is the right choice. Thus under Time-and-Materials contract, the performance of other parties involved in the project will not be a responsibility of the contractor. So if the client’s developers will not succeed with their tasks this will not affect the contractor in any way.
#3 – The client is a large company with bureaucratic culture
Endless meetings are hard to estimate in advance when the contractor plans to work on a project for a large corporation. Under Fixed Contract, it’s almost impossible to predict how many hours those meetings will last. On the other hand, Time-and-Materials contract allows much more flexibility and thus more accurate estimations.
#4 – Time-and-Materials contract is the requirement of the client
Such case happens when the client already trusts the contractor and ready to accept the risks involved when using this type of software development pricing model.
Software Development Pricing Models: Fixed Price
- Fixed budget
- Permanent project scope
- Settled time-frame
- Possible compromise on quality
IT companies use the Fixed Price model for small software development projects with clear requirements, set specifications and defined timelines. These can be prototypes or simple solutions for internal use. The project requirements under Fixed Price pricing model are well-documented. Moreover, normally they don’t change during the course of the project implementation. Usually, this model is also used for short-term software development tasks, which don’t require close supervision from a client.
For clients, Fixed Price contracts for software development mean they can set a fixed budget for a particular set of tasks negotiated beforehand. For software development service providers a Fixed Price contract model usually assumes easy money earned for a simple project implementation. That is so because they usually don’t require any additional or completely new knowledge on a contractor’s part.
Zero flexibility in changing the software development project implementation is the main disadvantage of a Fixed Price model. Sometimes a client decides that a certain functionality implemented on a Fixed Price contract no more suits his business needs. The client then asks for additional functionality development for free, assuming the predefined initial price covers any new changes in development. This is a critical misleading point while software development service providers and clients have to fulfill their cooperation terms equally. Also a little or no communication at all during a Fixed Price contract cooperation may eventually result in unsatisfactory deliverables despite the contract terms decided upfront.
In agile development choosing between the above-mentioned software development pricing models Time-and-Materials model is the most suitable and efficient for both contractors and clients. Taking into account mercurial market conditions, close communication with a development team ensures you and your business will get the most out of the cooperation with outsourcing software development provider. A fast and timely adjustment of project specifications inures to the benefits of your product for its end users. At the same time going with Time and Materials, you still will get time estimates. You are also able to plan budget and timeline for your project.
Summing up, if you can’t decide in favor of any of the above-described pricing models, you can always find a happy mean and try Proof-Of-Concept approach. In this case, the development team makes a simple prototype of your solution within a fixed time-frame. In the meanwhile they research and confirm technical potential of the project. This approach may inspire confidence in you regarding further cooperation with the provider and will also help you to crystallize and verify the concept of your product.