When choosing a model of engagement with an IT service provider, you should pay attention to what opportunities this model opens up. Two common options are Fixed Price and Time & Material. If you’re unsure how to price your next project, read this blog post where we introduce you to the definitions of Fixed Price and T&M models, outline key advantages and risks of each model, examine cases based on lessons learned from hundreds of projects we delivered, and explain why more clients choose T&M over Fixed Price.
What is Fixed Price?
Fixed Price (or sometimes called Fixed Fee) is an engagement model where you are quoted a price for the scope of work and deadlines calculated and fixed in the specification. The final cost of work is agreed upon before the start of development. Any changes in tasks are calculated in individual specifications.
This means that the IT service provider takes on the responsibility of delivering the project within the agreed budget and timeframe, regardless of the actual resources spent. The model provides certainty for the client, as they know exactly how much they will be paying upfront. However, this type of cooperation may not be suitable for companies with evolving requirements or a high degree of uncertainty, as any changes or unforeseen challenges may require additional negotiations and potentially incur extra expenditures.
The project team is formed after assessing the requirements and includes the specialists needed to complete the work in the amount of hours fixed in the specification. The work is carried out according to the internal processes of the contractor. The client communicates only with the project manager who plans the roadmap and manages the team.
What is Time & Material?
Time & Material or T&M is an engagement model where a dedicated team of specialists is assigned to your project. The tasks, requirements and priorities of the project are determined and changed iteratively. This model offers flexibility and transparency, as the client has more control over the project direction and can make changes along the way.
It also is more flexible to evolving requirements and unforeseen challenges, as it allows the client to adjust the scope and priorities as needed. However, the time and materials model may introduce uncertainty for the client in terms of the final cost, because it is difficult to predict the exact amount of time and resources required. In fact, the job may take more or fewer hours than originally planned.
The project team is formed before the start of work individually on each project. A typical team includes a project manager, business and system analyst, developers and testers. The team structure depends on the presence or absence of technical specifications, the scope of functionality to be developed, design requirements, release dates and monthly budget.
Dedicated T&M team always starts with assigning a project manager on the contractor side.This is a core member, must have for every project following this engagement model because the project manager is responsible for coordinating the work of a dedicated team. Project manager has deep expertise in managing IT projects and is highly engaged in communication. Having a project manager on the contractor’s side always gives our clients more confidence that a subject matter expert with IT and eCommerce experience will lead the project, prevent side tracking, control backlog, manage any HR issues, and make the development predictable.
Fixed Price vs. Time & Material: Key Differences
The key differences between Fixed Price and Time & Material pricing models lie in the following:
|Characteristics||Fixed Price||Time & Material|
|Pricing Structure||The price is agreed upon before the project begins. The client pays a set amount regardless of the actual time or resources required to complete the project. The scope of work is fixed in a specification.||Before the project begins the client and the contractor agree on hourly rates for each project role. Each month the client is billed for the actual working hours of a dedicated team.|
|Cost Certainty||The client has cost certainty provided the volume of work fixed in the specification does not change. This can be beneficial for budgeting purposes.||A T&M model does not provide cost certainty for the whole project, as the final cost will depend on the actual time and resources used. This can make estimations challenging for clients when it comes to an accurate prediction of the total project cost.|
|Terms of Payment||In a fixed price model usually the customer pays 100% of project cost in advance.||In T&M the payment is made monthly or as agreed with the contractor, you may pay the deposit at start and then pay for the actual hours based on monthly reports.|
|Project Team||When you choose a fixed price model, the project team is formed after the requirements assessment and includes the specialists who are needed to complete the work at the amount set in the specification.||In T&M the dedicated team is formed individually for each project and phase. A typical dedicated team includes a project manager, developers and testers. Plus, the clients may add any other roles such as system analyst, system architect, UI/UX designer, system administrator and so on depending on the business tasks. The customer may request the project manager to size the team depending on their budget.|
|Risk Allocation||The risk is primarily on the service provider’s side. They need to deliver the project within the agreed-upon budget, even if it requires more resources than anticipated.||The client bears the risk of the project taking longer or requiring more resources due to the high level of uncertainty of tasks.|
|Flexibility||A fixed price model provides less flexibility for changes or adjustments to the amount of work during the project. Any additional work beyond the original scope requires a separate agreement and charges.||A T&M model offers more flexibility as the client may request changes or additions to the project, for example, when you want to estimate your business idea and don’t have comprehensive technical requirements from the very beginning.|
|Client’s Involvement||This model assumes low involvement of client’s personnel during the project.||This model requires high involvement in setting tasks and priorities, including possible deep involvement in technical issues.|
Ultimately, the choice between Fixed Price and Time and Material engagement models depends on the specific project requirements, budget, and level of flexibility desired by the client. It is important to carefully evaluate the pros and cons of each model before making a decision. Additionally, it is advisable to have clear and well-defined project boundaries to minimize potential misunderstandings and disputes, regardless of the cooperation model.
Deciding on the Best Fit for a T&M Contract
Time & Material, as we’ve already learned, refers to project-based work where the client pays for the actual time spent by the contractor. High level of uncertainty has its own pros and cons.
Advantages of time and material contracts
- Quick start, you don’t have to spend time compiling a detailed specification (which may take up to several months), considering all the details in advance.
- You will get the result iteratively, and at any time you can decide on the functionality sufficient to launch a project, and in parallel refine the missing functions.
- You can move faster or slower by increasing or reducing the development team.
- The development process becomes as transparent and controllable as possible. The client can independently track progress through reports and intermediate demonstrations. You will have the opportunity to ask questions in the team chat and get a response much faster than working on a specification
- Assigning specialists to the project for a long time.
- Unlike the fixed price model, you only pay for the hours worked.
- More opportunities for the development of an IT product, search for different options and tech stack for solving problems may lead to significant savings.
Risks of time and material contracts
- Due to the high level of uncertainty of the tasks, the preliminary estimate in hours may change during the course of work.
- It is difficult to estimate the final budget of the project.
- Providing a guarantee becomes impossible, as the requirements are constantly adapted to the project.
When to Choose a T&M Model?
When deciding the best fit for a Time & Material contract, consider the project complexity: T&M contracts are more suitable for complex projects with evolving requirements.
- Hypothesis testing
- Minimum Viable Product launch
- Projects with complex architecture
- Redesign and refinement of the current project
- Support for projects with a constant flow of tasks
You also might need a dedicated team in the following cases:
- Change of technological platform while keeping the same or similar functionality.
- Rapid implementation of new functionality.
- “Project on fire” when the customer’s team fails to complete the work on time.
- “Project rescue” if the current contractor did not finish the job for some reason.
Determining the Ideal Scenario for a Fixed Price Contract
The predetermined price and scope of work that remain constant throughout the duration of the contract have their pros and cons.
Advantages of fixed price contracts
- You know exactly how much and for what scope of work you pay. Therefore, you include this in your budget and do not worry about anything else.
- Due to a detailed and clear specification and roadmap, you do not need to be involved in every stage of the work.
- Warranties are included in the price. If something goes wrong, the contractor will fix the defects with no additional fee within the guarantee period.
Risks of fixed price contracts
- Pre-project analytics can slow things down. Before development begins, it is important to draw up and agree on the detailed documentation. This means a quick start is not an option in this model.
- Any changes in the project require an additional budget and approval of a new specification, which actually suspends development.
- Lack of flexibility. The client has no detailed visibility unless the final result is delivered.
- The cost includes risks in case of unforeseen situations.
- High risk of choosing the wrong technology stack. While the project is being implemented, the client’s business goals or the market situation may change, and the chosen solution will not be entirely successful for this.
Ideal Scenario for the Fixed Price Projects
While determining the ideal scenario for a fixed price contract, one should understand the various factors affecting the price: the nature of the project, the level of certainty in the requirements, and the market conditions. Speaking about eCommerce, Fixed Price is ideal when:
- You have clearly identified needs at each stage of the project
- Projects with a limited budget and tight deadlines
- The project is small (up to 3 months) and the requirements will not change
- You want to reduce your participation in the technical part of the project
Case Studies: Real Examples of Time & Materials and Fixed Fee Projects
Case Study 1: Time and Materials Project
The project owners addressed us to develop a delivery dashboard acting as a distribution hub for vendors like Uber Eats. The project was rather complicated with lots of interdependencies between third-party services to cover with one or two task specifications. The project requirements were not fully defined at the start, as the client wanted to incorporate feedback from their vendors during the development process.
Simtech Development proposed the Time & Material pricing model for the project. We estimated the resources based on the initial requirements and provided an hourly rate for the team members. Throughout the project, the scope changed multiple times as the client discovered additional requirements and requested modifications. We kept track of the actual time spent by team members and provided regular reports to the client, detailing the progress and the associated costs. The project was successfully completed within the agreed timeline, and the client was satisfied with the final product.
Gulnaz, Project Manager:
One of our clients came to us after having a not so positive experience with another contractor. They already had a heavily customized website, but the client did not like the quality of work. We suggested a dedicated team within the T&M model to gradually refine and refactor the code of the previous developer. If we decided to go with specifications, then, firstly, estimation of work would take a lot of time, which means postponing the launch, and secondly, each new task specification would most likely require new investments because of numerous modifications to the project.
Case Study 2: Fixed Fee Project
In this case, the business owner requested us to redesign the Pak-Man corporate website. The amount of work included creating a new design, implementing new features, and integrating a new system. The project requirements were well-defined, and the client had a clear vision of what they wanted. They came to us with specific final outcome descriptions that were easy to evaluate and set in a specification. Simtech Development proposed a Fixed Price model.
Throughout the project, the scope remained stable, and there were no major changes requested by the client. Simtech Development diligently worked on the project, meeting the agreed timeline and delivering the desired outcomes. The fixed price model provided predictability for both parties, and the client knew the total cost upfront, without any surprises. If one task was completed, and other requirements arose, the client just signed one more task specification with us.
The project was successfully completed, and the client was satisfied with the redesigned website. Moreover, the Fixed Price model allowed the client to have a 100-day guarantee for all the modifications implemented (which is the key difference with the T&M model).
To develop your project in a cost-effective manner, one should select the right engagement model with an IT service provider to develop your project in a cost-effective manner. It’s important to carefully consider the project requirements, amount of work, and level of flexibility needed before choosing a Fixed Price or Time & Material model. So which is better?
The truth is that many software companies are moving away from fixed price contracts (except perhaps for simple and fast projects that don’t assume major technical challenges) and are moving towards a Time & Material approach which allows everyone to be more flexible and get a better end product. T&M contract allows you to flexibly manage resources during the project and iteratively move towards its successful completion. The general trend in the market is as follows – the faster you launch the project, the more profit you can get from it.
We have covered the most important things such as ideal scenarios, advantages and risks of each model in this blog post. In case you still have questions, or you are not sure which model suits your specific business, feel free to contact us for a piece of advice.