Initially, clients and businesses were building agreements upon a fixed price when it comes to outsourcing. But today, there is a different type of model, the time and material model. In some cases, businesses can use a hybrid of these two models.
Both models are based on different principles and approaches. They have advantages and disadvantages and may be useful in different situations. But how to choose a type of model. It’s important to make the right decision when it comes to developing software.
Check out the article to learn what type is best in your case. Learn more about the advantages and disadvantages of each type of model.
A fixed price model is when a client indicates all the requirements and characteristics of the project they want to receive. A software development company considers everything and creates a plan where they estimate when the project will be done and how much it will cost.
These calculations made by the software development company, or vendor in other words, create the basis of the contract with a fixed price. The vendor explains in detail the scope of the project, cost, and deadline. All these details form the price.
The payment for the project can be broken down into different smaller payments, but the overall price on the project is fixed and will not change. The model works best when you have to deal with a project that is:
One of the key facts to note is that the project should be with a defined scope. Meaning it has little to no unknowns that can increase the price.
Here are some of the key advantages of using the price model:
And as for disadvantages:
A typical time and material contract aims to solve the problem of the fixed price model — lack of flexibility. When it comes to more significant projects, there are various unknowns that are difficult to predict. Meaning, there may be additional expenses on resources needed to complete a project.
The time and material model requires a different payment method. A vendor will charge the client based on the price of the materials needed and the hourly cost spent on creating the product.
The contract based on this model will include prices on the usage of resources hourly, weekly, or monthly. A vendor and the client should also agree upon the timeline of the project.
One of the main differences between this and the fixed price model is that it allows changes. If something unexpected happens, for instance, the need to upgrade the software or scheduled maintenance, it is possible for a vendor to add these changes.
Since changes to the contract are possible, both clients and vendors prefer time and material model when:
The idea is that if you have a big project in mind, and it’s nearly impossible to define the characteristics of the end product, it’s best to use the time and material contract as it is a lot more flexible.
Here are the key advantages of the system:
As for the disadvantages, there aren’t many. Budget problems may occur, but the usage of key performance indicators gives you more control. This type of model also requires your full involvement in the project development.
As you see, both models have advantages and disadvantages. Luckily, it is easy to choose a model based on the result that you want to receive. If you have a big project in mind, it is preferable to choose the time and material model since it has a lot of unknowns. But if the project is small and easily scalable, a fixed price model is perfect!
See what running a business is like with Global Cloud Team on your development. Please submit the form below and we will get back to you within 24 - 48 hours.