The right pricing model is very important to achieve the goals of your software development project. It provides a sound foundation for success when aligned with the complexity and objectives of your endeavor. The fixed pricing model brings predictability in costs and pre-defined scopes. The Time & Materials model offers unparalleled flexibility and transparency, allowing dynamic adjustments as the project evolves.
This blog post discusses the advantages and considerations of the Fixed Price model vs Time and Material and why we choose Time and Materials when developing software projects. It also shows how it can enable teams to deliver high-quality results without rigid limitations.
Stfalcon is the place where your ideas are transformed into robust and quality solutions. We provide solutions for startup - to enterprise-level businesses, including CRM development, web-based solutions, and iOS and Android app development.
Fixed Price Model
The fixed pricing model makes sense for projects when the scope is well understood - usually because the client has clearly described terms of reference (TOR) and project vision. Understanding the pros and cons of a fixed-price contract is essential when considering whether to use one for a project.
Key Features of the Fixed Price Model
- Pre-Approved Budget. The total cost is determined and agreed upon at the outset, providing financial certainty for both the client and the service provider. As long as the project adheres to the terms of the original agreement, there are no surprises in costs.
- Fixed Work Scope. The deliverables in the contract, from functionality to design, are explicitly agreed upon. This ensures all parties involved have the same understanding, leaving no room for misunderstandings.
- Defined Deadline. The timeline for completion is locked in at the beginning. This helps the project adhere to a strict schedule, which results in on-time completion.
- No Mid-Project Changes. Once the contract is signed, changes in the scope, budget, or deadline cannot be accommodated without formal renegotiation. Stability makes project management more manageable for the provider, with fewer risks.
- Suitability for Predictable Projects. This model works well for simple or repetitive projects whose requirements, like standard website builds, application development, or feature enhancement, would not change much.
- The fixed-price model provides clarity and predictability but can be insufficiently flexible. Therefore, planning and estimating costs before the project starts is crucial.
Advantages
- Fixed Costs. The client benefits from cost certainty; the outsourcing company cannot charge extra fees even if the development requires more time than estimated.
- Predictability. The project plan is well-defined, given a set release date and total cost.
- Ease of Monitoring. With a fixed budget and timeline, clients can easily monitor the progress and ensure that tasks are completed as scheduled without getting deeply involved in the development process.
Drawbacks
- Inflexibility. The contract is hard to change for new requirements or changes in the market; this will usually be done by signing the addenda.
- Lengthy Planning. The requirements are extensively discussed and analyzed in detail, significantly increasing the length of the planning period.
- Risk of Overpayment. If the estimates are too conservative and the team finishes early, the clients will have paid more than the value of the delivered work.
Ideal Use Cases for the Fixed-Price Model
The fixed-price model works well when all requirements are clear and the client and development team have a shared vision of the end goal.
It also applies well to projects of minimum complexity, such as developing a simple website, a basic mobile application, or a prototype. In such cases, precise tasks allow for correct cost and timeline estimations. Moreover, projects with short durations or very tight deadlines can use a fixed cost pricing model to make the development smooth without frequent scope changes.
This model would be appropriate where both parties are concerned about predictability and budget control, and the original plan is not likely to change much.
The fixed-price model is more common in short-term projects or MVPs, where requirements can be precisely defined and estimated beforehand. However, this model usually benefits neither the client nor the development teams in more complex or evolutionary projects, making it less common nowadays.
Time and Materials (T&M) Model
Don’t be confused by the word «Time» in this pricing model. A Time and Materials model doesn’t mean that you simply pay for the developer’s time. Contract T&M assumes payment based on the work’s performance. If you want to go into more detail, here’s how it works.
Features of the T&M Model
- The Project is broken down into tasks, each of which will be separately estimated so you can add or modify anything during project development.
- The team will provide an up-front estimate for the total project, but this approximate figure will likely change - either up or down - as requirements are clarified and developed. At the outset of the project, a budget benchmark will be set to help guide planning and expectations;
- Multiply man/hours and developers rates; we got the task estimation here. If you agree with the sum - we start;
- The client pays monthly invoices and makes an advance payment at the start - the first month of the team's work.
Working on the Time and Material pricing model, the developer is interested in delivering you quality results at the most suitable time, as this ensures the possibility of further successful cooperation.
Advantages
- Aligns with Agile Development. The T&M model works well with agile methodologies; it allows for iterative development and adjustments as the project develops. It supports the concept of continuous improvement, where every iteration is based on the outcome of feedback and testing.
- Flexibility in Scope. The other most significant advantage T&M brings is that for every new feature and change, the development team can easily accommodate it at any point in time without having to renegotiate the contract terms. This makes it the best fit for dynamic projects with requirements that will change over time.
- Customer Involvement and Collaboration. Under this model, there is an opportunity for constant customer engagement, where the client could give feedback at any stage of the development process. It assures that the project is on track and that the final product will follow the client's vision.
- Transparent Budgeting. With T&M, the client is charged for actual hours developers work; hence, they can keep track of costs as they build up. The transparency in resource use lets clients monitor how resources are being used and adjust the project scope if needed.
- Faster project implementation. With T&M, a full-scope definition is not a precondition to the starting point of a project. One can begin working on it sooner, which comes in handy when there is acute demand to initiate development as soon as possible without big planning or negotiating times.
- Visible Progress. The client is constantly updated on the project's progress, and there are tangible results after each stage. Visibility helps manage expectations and allows for early identification of potential problems or areas needing refinement.
Drawbacks
- Active Customer Participation Required. For the Time and Materials model to realize all its benefits, clients must be actively involved during the development process. In other words, regular feedback is given, progress is reviewed, and decisions are made at the required time. Project success depends upon the commitment shown by the client in communication and collaboration.
The T&M disadvantage is additional communication with the company. However, this may be a plus — when discussing details, you always know at what stage your project is, where it moves, and may add improvements or changes to it.
Why We Work On The Time And Materials Basis
We develop complex solutions for large and medium-sized business — those are complex services for logistics, CRM systems, mobile applications, etc. During almost 8 years of practice we have seen that at the large project’s development start, customer very rarely has an accurate idea about all the required functionality. With the step by step project development, we together with the customer delve deeper into the project’s needs, this is how new ideas and improvements appear. Time and Material model is very convenient in this case — you can make adjustments directly in the course of the work.
Few more Time and Materials advantages
- this is a flexible pricing model, which is perfectly compatible with Agile principles;
- the ability to quickly proceed with the development — unlike Fixed Price contracts, working on the T&M basis you can get to work almost immediately;
- transparent hourly rates allow the customer to manage tasks, deadlines and budget;
- the opportunity to get the visible result of the work at each stage;
- You receive a solution that meets your expectations.
Insights
If you have a small project with precise TOR and you are 100% sure that you will not make improvements, then you may go for a Fixed Price Contract. However, you should be prepared for possible flaws, errors and deadlines extension in order to correct bugs.
For customers who need to develop large long-term projects, we recommend to diverse risks, choosing a flexible development and payment — Agile management and Time&Material pricing model. Your idea is worth to be paid special attention to. Close communication and discussion of all details will help to create a project that will indeed solve the problem of your company, and therefore will be effective, popular and have great potential for further development.
We have strong experience in delivering solutions for medium and enterprise companies. Would like to order the development of CRM, web based solution or android application development? Share your ideas on info@stfalcon.com Let’s bring your creative ideas into reality!
