Time & Materials and Fixed Price are two of the most dominant options when it comes to choosing a software development company for your project. Selecting one that provides you with the right pricing contract can be tough, especially if you don’t know what you might be missing out on when your primary goal is to scale your digital product. While on a fixed price agreement you’re paying for each completed task, on a T&M contract you will be paying for the time, labor hours, and resources spent completing your project.
Whether you pick one or another, you will need to know all of the project's specifics, timelines, price plans, and whether you’re able to manage the project at any time you wish.
Let’s take a look at what T&M vs Fixed Price contracts are, their advantages and disadvantages, as well as which one might be the best option for your software, web, or mobile app development product.
Table of Contents
What is a Time and Materials Contract?
➤ How do time and materials contracts work?
➤ Pros and cons of time and materials contract
What is a Fixed price Contract?
➤ Pros and cons of fixed price contract
Time and Materials contract vs Fixed price contract: Which one to pick?
What is a Time and Materials Contract?
A time and materials contract means payment for the effort based on daily or hourly rates. You will be paying for the amount of work, the hours and days that developers spend to complete your software, web, or app development project. T&M performs best when the digital product is more complex - this can seem like the company can inflate the project time and budget to infinity but really, that’s not the truth. Consider signing for a time and material contract when under any of the following circumstances:
- The scope of the project cannot be properly determined because of the high completely of the project, or most of the time due to external factors such as competitive development, market changes, requirements, and so on;
- The project has dynamic requirements, i.e., it operates in a competitive environment with competitors always launching new features, or some features might be dependent on previous development stages. Let’s say you pick a programming language but our development team suggests you one that might be better to develop your product.
- If you need flexibility in order to balance workloads, cash flow, or other resources that you might need to increase or decrease throughout your product's construction phase.
Now let’s take a better look at how time and materials contracts work and their pros and cons.
How do time and materials contracts work?
Simply put, a time and materials contract outlines how a company will pay a contractor for the time they spend working on a project, as well as the materials they use to develop the digital product. Again, a T&M contract is ideal when the duration of the project is undetermined but the labor involved has a fixed hourly rate or daily rate. For instance, here’s how a time and material contract works at Imaginary Cloud:
- The project is split into parts to understand what functionalities need to be applied and so that you can make all the changes or additions during the development process;
- Our developers work at a fixed day rate, which reflects their expertise, skills, and qualification level. Hence, we provide you with the number of days necessary to implement the tasks;
- Finally, you can approve the project's estimated timeline, resources needed and costs and agree to pay for them.
Pros and cons of time and materials contract
Pros:
The main reasons clients pick the time and material model are pretty obvious - quality, control, and flexibility. But there are benefits galore to choosing this model, being the main ones:
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Flexibility - The project scope and workload are completely adaptable to any changes you wish to make. Although at each given stage, the agency will provide all the estimates for the additional changes you required so you have a clear understanding of the investment needed
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Control over the project - You’re able to have as much control over the project flow as you wish, as changes are flexible and adjustable under this type of contract.
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Scalability - If you want to extend your team depending on your digital needs, you may be able to do so.
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Budget management - You’re able to manage cash flow depending on your needs.
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Quality - This is partially due to contract terms allowing you more freedom, making the final product to be extremely flexible to continuously changing technological needs or business situations without wasting time on contract renegotiation.
Cons:
Some of the drawbacks of time and materials include:
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Over budget due to changes on the initial briefing - There can be variations if you decide to change your requirements in the middle of the project. If during the development process, you request any changes to your initial briefing, be aware this will come at a cost.
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Bad contractor - There’s always a risk to choosing an unskilled contractor or company so be aware of when picking amongst the companies you have in mind and how each one works.
What is a Fixed Price Contract?
A fixed price agreement or lump-sum contract is characterized by fixed product requirements and a fixed project cost. Under the lump-sum model, the contractor submits a total project price instead of charging for each individual task or hours taken.
Fixed price works best for SMEs software projects and business solutions that are of low complexity. A fixed price agreement is usually used under the following conditions:
- When the project scope is clearly defined and is not expected to suffer changes throughout the process;
- When the project is straightforward to complete.
Pros and cons of fixed price contract
Pros:
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Certainty of costs - For both yourself and the company you’re hiring, fixed price provides a predictable scenario as well as stability during the contract's duration. For instance, you may be apprehensive that the price of a certain service will rise unexpectedly, disrupting your business goals - fixing the price eliminates these concerns.
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Budgeting - Although signing for fixed price in general costs you more money upfront, you can actually budget for the contract’s expenditures.
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Set timeline - Since the features and the end goal are set in stone, the variations on the timeline are close to none, ensuring a more stable timeline.
Cons:
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Paying extra margins - A fixed price contract gives you more assurance about the future costs of your service, but that may come at a cost. The company may recognize the risk it’s taking by setting a price and hence charge a higher price than it would for fluid pricing.
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Rigid process - After you sign for the fixed price contract, if you find you want to make changes during the development process, there is no way to update, improve or add features to your digital product. Consider the case when market demand changes and a feature becomes outdated or a new feature is required or when your product is being developed already. Without negotiating each new feature and repeating the planning process, you won't be able to modify the scope of work. This might create a considerable delay in your project’s launch.
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Not recommended for mid to large-scale projects - If your software, web, or mobile app is complex, such as an e-commerce website or a multi-platform mobile app, the fixed approach will be extremely rigid. Elaborate functions, dependencies, and lengthy implementations demand constant review, adjustment, and flexibility so this might not be the best contracting model for you.
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False certainty of costs - Illustion that the cost of the project is fixed, but in reality, when things go sour and contractors start to lose money, the priority of the project is lowered, development slows down and often these contractors are forced to look for revenue sources somewhere else - meaning that your project will slowly be abandoned.
Time and Materials contract vs Fixed Price contract: Which one to pick?
If you hire part of your software development work to a third-party, you may think that the best type of agreement to sign is fixed price: here, you set the scope, they promise the time and price, they deliver, you check the quality, and you pay. It sounds right, but in reality, it could not be the right fit for your project as you might come to find that you need to make additional changes that you will not be able to make for being under a fixed price agreement. Also, according to Techreviewer, only 16% of companies prefer working with a fixed price model.
A Time and Material contract, on the other hand, will tell the company how many resources you need: they give you a quote per day, you manage them with the help of a PM, they build a plan for you, and you agree to how much time and resources are needed to complete your digital product - this is much more effective as the T&M contract model is manageable since day one.
In case your final briefing is close to the initial one, the budget defined at first won't change much. Plus, if you need to make changes during the development process, depending on their complexity, you know what you can expect and the price to pay won't be as different than the one previously agreed.
At Imaginary Cloud, we offer clients a Time and Materials contract model because we are aware of the complexity of the projects we work on, and that are impacted by internal and external factors that need to be addressed throughout the development process to ensure it delivers towards the initial objective. Only T&M contract provides you with the flexibility to address these ever-changing needs.
We help you identify the specific needs and objectives of your software, web or mobile app, as well as assemble a team of the right people to make it happen. Our PM and development team has vast knowledge in project evaluation, allowing us to make a very reliable estimate of your projects, always ensuring the flexibility to adapt to your requested changes.