Before deciding on developing your digital product and business, choosing the right IT business partner is not the only issue you have to deal with. Another essential question that you have to ask yourself is whether you prefer to work on a basis of the Fixed Price or the Time&Material pricing model. Both of them have their own advantages and disadvantages. Depending on your approach, needs, and scope of your project, there are a few aspects that you ought to consider. Take a look at a brief comparison below to help you make the right decision. Let’s consider these two pricing models on 4 different layers.
1. Flexibility
Time and Materials:
This cooperation model works when the employer pays the contractor for the exact amount of time and resources used during the development process. Consequently, it gives a much wider field for flexibility. In time and material contracts introducing changes are not a problem at all. They just move other items down in the backlog. This type of contract provides you as the employer with a great sense of control over the project right from the planning process. You set the priorities according to your own preferences with your dedicated team. You’re also the one that decides about the type of actions that should be taken in the next sprint.
Fixed Price:
On the opposite side, there’s a fixed-price model where the development process is set up and structured within a fairly rigid framework right from the start. All requirements, scope of work, budget, and timeline are fixed here. Contrary to T&M, the process of implementing any changes and modifications is much more complex – most frequently it requires renegotiation of the deal. And that could be quite a costly move. In order to avoid these consequences, you should assume that there will be no changes during the project and be sure about it. The fixed price model forces both the client and the development team to stick to the order of implementing features written in the contract. Otherwise, it can influence the development time and the settlements.
2. Launch time
Time and Materials:
T&M model usually implicates quicker results because it doesn’t focus just on developing a plan and talking about the findings but rather on building and improving the product in a repeatable cycle. The project starts quicker and the results are visible faster as well. In fact, there’s a higher risk of making mistakes but also bigger chances to address and improve them immediately. Thanks to T&M pricing approach, you are able to reach your target audience and verify the value of your product faster.
Fixed Price:
The fixed-price contracts on the other hand will allow you to plan everything from scratch and then outsource the work due to “set-and-forget” approach. It’s quite a comfortable situation in case your project doesn’t require too many adjustments and you just want to have your work done within a specific time frame. If, however, you’d change your mind in the middle of cooperation and would like to introduce any modifications “ad-hoc”, it will require renegotiating the deal and re-determining the tasks. Unfortunately, it may cause delays in the market entrance of the product even past a T&M contract.
3. Budgeting
Time and Materials:
One of the significant advantages of T&M contracts is the fact that you’re able how much work you can get done. What is more, thanks to this pricing method, you can assess the amount of time spent on the project cost of the project accordingly to your specific needs and demands when it comes to time and budget scope. The software development process is a very flexible sphere. There’s a lot of space and tolerance for innovation and improvisation. With code, you can always pivot while developing any software project. Adjustments and modifications here are refreshing and sometimes even require some modifications and an agile approach.
Since the cooperation in the time and materials model is open-ended, you can decide to finish off the project at any time when you feel that what has already been done is enough to have a good MVP. You have the opportunity to decide on an ongoing basis about what is happening in the project based on the observation of the results so far. It’s a very comfortable situation in the long run.
Fixed Price:
Deciding on the fixed price agreement, you have to be aware that all requirements, arrangements, budget, time scope, or limits are estimated and set in advance, at the beginning of cooperation. Shortly speaking, it’s a top-down price estimation for your project. Together with your chosen software development company, you determine all conditions which will be valid throughout the entire project. Nevertheless, the fixed scope and fixed daily rate give you a sense of stability and predictability.
The only situation when the fixed budget can change is when you’ll ask the software development team to make adjustments to the initial scope. In such circumstances, the client pays for these additional conditions, not written in the contract at the beginning. Moreover, some advanced modifications will require renegotiating the agreement, extra meetings, quoting, and futile documentation. For that reason, the original project duration can be extended, and even more, time will be wasted on completing all the necessary formalities around it.
Furthermore, you won’t have any flexibility in controlling the budget. Waterfall development is here impossible and therefore also the prioritization of tasks and features. In Fixed Price, it’s much more difficult and effortful to be agile and flexible about the scope.
4. Management of the project
Time and Materials:
Because of the dynamic pace of this type of cooperation, your involvement in the whole process will be higher. What is beneficial in this situation is that you’ll have also a greater sense of control of what’s happening there on a regular basis and you can reconsider some settings based on current outcomes and results.
Fixed Price:
Fixed-price contract model allows easy management of the project. The client’s involvement and interference in the project is minimal, after the initial settlements. The expectations are clear and transparent. The same with payments. Usually, everything works in a constant, predictable way.
What type of pricing model should I choose for my project?
Now you have an overall idea about these 2 pricing models in software development, their advantages, disadvantages, and essential differences between them. However, none of them are good or bad, each fits just a different type of project. You should consider them both and make the final decision depending on your needs and expectations.
Choose the Time&Materials model if:
- your project is too complex to precisely estimate the size of it at the initial phase
- you expect the requirements will be changing over time
- development of the project will be highly dependent on the user experience and introducing changes and modifications will be happening on a daily basis
- you’re planning a long-term project with dynamic requirements
- you don’t know the full project scope yet from the beginning
- you need to apply a flexible and agile approach to your project and have the ability to implement modifications of the scope and variations of the workload
- you would like to have a great impact on what’s happening in the project
The time and materials pricing model works best for long-term, innovative and dynamic projects.
Choose the Fixed Price model if:
- you know exactly what you need from the beginning and you don’t expect any changes in the middle of the cooperation
- your expectations toward features included, final results, budget, and time scope are rigid and known from the beginning
- you have an impassable deadline for your project and you want to be sure it will be delivered on time
- you don’t want to interfere with the work while it’s in progress, and you want to “set-and-forget”
The Fixed Price method works best with small projects with specified limitations and requirements.
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Hopefully, all the above-mentioned strengths and weaknesses of both pricing models will make it easier for you to make the decision. However, the contract type that we strongly recommend as Applover is the T&M due to the fact that we strongly believe in the power of innovation, agility, and constant changes. Working with us on the basis of the type of agreement, you’ll still have control over the budget and our team will remain engaged in order to reach milestones. Additionally, you can simply resign from working with us on a one-month-long notice period. And even in this case – everything we created is your intellectual property, you keep all the work, no matter when you chose to cancel the contract.
