- Time and material vs. fixed price model
- Why do companies prefer to stick with the fixed-fee model, and why they're (usually) wrong?
- Why is the Time & Materials pricing model so perfect for software development?
- When is the Time and Materials pricing model the only possible option?
- What projects are suitable for the fixed-price model?
One of the most obvious and crucial questions that come up at the beginning of any software project is “how much will it cost?”.
We get it. There are budgets, investors, and deadlines. However, most of the time, the old, well-established fixed-fee model just isn’t suitable for software development, while the flexible Time and Materials model works just perfectly. In other words, let’s talk about the money and how to spend it well in software development.
Time and material vs. fixed price model
Let’s quickly explain the difference in meaning between the two most common pricing models:
- The Time and Material model means that a client pays only for the devs’ and other project members’ time spent on the project, plus the cost of necessary frameworks, hosting, or other external services
- The fixed-fee model is the traditional method, in which an agency gives a client the total, final price for the project. In order to cover any unexpected costs that may come up during the process, fixed-priced estimations always include a sort of management reserve of up to even 30%, depending on how unclear the initial specification is. To put it simply, they’re usually more expensive for the client.
Why do companies prefer to stick with the fixed-fee model, and why they're (usually) wrong?
Whether it comes from corporate policy or financial reasons, there are cases in which clients prefer to ask for fixed-price estimations, even if it’s not necessarily good for the project. Why is that?
One of the most common reasons is a limited and flat budget. Hypothetically speaking, the argument makes sense - I have a specific budget, and I need to stay within it. In reality, this way of thinking bears a certain risk. The thing is, a fixed-price model requires a very precise and thoroughly outlined vision of the end product (or MVP if that’s the goal). Of course, it must be documented in the form of a PRD (Product Requirements Document). After it’s accepted, a development agency has to execute the plan. Unfortunately, given the dynamic nature of the software world, it’s extremely difficult to predict every part of the process before it begins. For non-technical founders and startups without programming expertise, it’s virtually impossible.
Any changes to the original idea in this pricing model result in additional costs, so it’s always worth asking yourself, “how sure are you about the idea in its initial form?”. Of course, we also can’t forget about another instrumental and often underestimated aspect, the customer feedback. The bottom line is that the development process never ends with the first version.
Why is the Time & Materials pricing model so perfect for software development?
While some founders are still doubtful about the financial uncertainty of the T&M pricing model, most of the time, it ends up being a cheaper, safer, and better option, even from the product quality standpoint. So what are the reasons that make it the favorable choice?
You can start software development process almost immediately
With the fixed-price model, it can take even three months before devs write the first line of code. The preparation includes creating and approving the product specification, estimation, preparing necessary mockups, and even final graphics in some cases because they might be needed for front-end estimation.
Without the need to prepare a fixed-price estimation, all those processes can start pretty much at the same time, whether it’s UX, design, or programming. It only takes preparing a backlog of tasks, which can be prioritized according to current needs.
You have more flexibility and influence on the project
The rigid rules of fixed-price contracts can make the development a very strict and static process. Any additional features may require a new estimation, which takes time and increases cost.
Contrary to that, the development process in the T&M model is perfectly designed for clients who want to be active participants in the project with a lot of space for modification. When nothing is predetermined at the start, it’s entirely possible to change the direction of the project, add new features, and modify the final idea, especially with the tools provided by Scrum, which brings us to the next point.
T&M project management with agile methodologies
One of the key reasons why agile was so broadly embraced by software development agencies and appreciated by clients is the transparency it provides. Agile methodologies, such as Scrum, are based on the idea of setting partial goals for the projects, which are supposed to be completed in 2-week sprints. After each sprint, a client and all team members are meeting to review the progress and exchange feedback.
The idea revolves around constant improvement and assuring that the project is heading in the right direction. With the flexible nature of the Time and Material pricing model, a client can truly benefit from the tools provided by Scrum, being an influential part of the team. Another upside of Scrum is that it allows you to identify and fix any errors quickly. Let’s be fair. Mistakes happen and what makes you a good developer is how efficiently you solve them. You can read more about the value of Scrum in the article “What are the benefits of agile methodology in software development?”
The Time & Materials model makes developers more committed to the project
The fact is, developers are intelligent and creative beasts, and being a part of the constantly evolving project brings the best of them. Experienced devs can not only execute the project well but use their expertise to make it even better than it was initially imagined. The T&M model, along with Scrum, gives them a perfect opportunity to do so.
When is the Time and Materials pricing model the only possible option?
Putting aside the preferences, there are some cases in which it’s simply impossible to prepare a fixed-price estimation.
What kinds of projects must be developed in the T&M model?
- if the project development is estimated for longer than six months
- if it’s based only on a rough idea without technical details
- R&D-type projects with the unpredictable outcome
- ideas that are still in development
- projects by startups
Some other examples of T&M-bound projects may involve projects that are based on cutting-edge technology in a competitive market. If there’s a lot of potential competition, it’s best to be prepared for significant changes during the process just to stay relevant. The ability to smoothly pivot from one direction to another is possible only in the dynamic environment that the agile methodology-fueled T&M model assures.
Creating trailblazing software by definition must be open to changes as new technologies and solutions are emerging on a monthly basis. In addition to that, the model allows to deliver early-stage versions to users much faster and gather valuable feedback to perfect the final idea. Without those aspects, it’s virtually impossible to compete.
What projects are suitable for the fixed-price model?
Of course, despite the overwhelming upsides of the T&M model, some types of projects are perfectly suitable for the fixed-price method. For example
- 1/1 copies of existing platforms, websites, or apps
- simple projects with limited scope and full documentation
- desktop to app/app to desktop development
If you have one of those kinds of projects at hand, make sure to read our article “When to choose a fixed price model for software development?.”