Fixed price vs time and material: what to choose

Fixed Price Model Vs Time And Material Approach

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.

What is a Fixed Price 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:

small and doesn’t require a lot of adjustments;
is turnkey, meaning this type of job has been already done, and little to no changes are needed to create a new project;
100% won’t need any adjustments;
has requirements that can be predefined.

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.

Pros and Cons of a Fixed Price Model

Here are some of the key advantages of using the price model:

Has minimum budget risks. The client has a clear outline of the project, so both the client and vendor are protected.
Predictable result. The project clearly states the characteristics and requirements of the end product.
Simple management. You just need to agree upon the payment schedule.

And as for disadvantages:

No flexibility.
Requires extensive planning.

What is a Time And Material Model?

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 project is big;
it is difficult or not possible to define all the requirements of the end product;
there may be a need to add adjustments to the project, requirements, or characteristics of the end product;
the client wants to be able to add changes as the project progresses.

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.

Advantages and Disadvantages of a Time And Material Model

Here are the key advantages of the system:

Flexibility since clients and vendors can add changes.
Easier and faster to set up the project, thanks to reduced planning.
Better control over the quality of the end product.
Trust and reputation link. The client has to trust the vendor, but a vendor needs to have a good reputation to earn trust.

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.

The Bottom Line

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!

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