Neither type of billing is inherently better over the other. There are advantages and disadvantages to both models. Clients should decide if they prefer the certainty of a fixed price, or the prospect of a lower bill when the work is completed efficiently ahead of schedule. But there is more than meets the eye.
How to choose wisely? The decision involves consideration of all the pros and cons and how they relate to your project.
Your clients prefer fixed price projects
Fixed price in a nutshell:
- good for projects with a very clear scope
- for projects where requirements are not subject to change
- when in-house and external staff have a strong grasp of the project and form a well-knit team
- where requirements are very clear and reaching milestones in allotted time should not be a problem.
On the face of it, a fixed price arrangement will always put one party in a slightly less favourable position. But this is not necessarily true. From the client’s point of view, the fixed price is safer cost-wise and helps to manage risk.
When starting a time and material project, especially a big one, there is a certain risk of variability. This means a project estimated to cost $300,000 could end up costing just $250,000. But chances are it could clock in at as much as $400,000 — you never know.
Fixed price approach takes this uncertainty out of the equation: the client signs a contract for $400,000, which is a little above the T&M estimate, but the cost shouldn’t exceed what’s stipulated.
The bottom line: in fixed-price contracting model every change of the scope of the project will require an additional quote. Which is time-consuming and costs money. We are also forced to have discussions like “which feature should we give up to build the additional one you have just mentioned?”
This is why, if you’re expecting changes, you should go for time and material instead. This will allow you to pay only for the final result, rather than for the time that the developer will spend delivering it. You provide the detailed specification (the “what”), and it’s up to the developer to determine the “how” part and turn it into a working product.
Thus, the risk of delivering the outcome in time and to the agreed budget is on the software house.
Software houses prefer time and material projects
Time and material in a nutshell:
- Good for vague, long-term projects
- Good when requirements are expected to change
- Unclear scope of work
- Scalability of the development team.
Unlike fixed-price contracts, time and materials contracts offer a lot of flexibility. Which is naturally a great advantage for the software house.
But it’s also a good approach for the clients. Especially if they don’t have a good idea of what they want, or when writing a good, detailed fixed price contract is impossible due to a lot of variables. Time and material is a good option if the client is not able to give the software house enough information about the scope of the project to get a reasonable bid. Once you (i.e. the client or the developer) have a better understanding of the project’s scope, a fixed price contract is worth considering instead.
After all, if the client doesn’t know what they want, how will the developer know what to build?
Since clients tend to change the requirements along the development process, the flexibility of time and material protects the software house and helps to avoid additional cost.
To effectively manage time and material projects, skilled project managers and relevant methodologies we need to track the progress of the project schedule, scope, productivity and quality. It is the job of project managers to make sure excessive lag is avoided and idle time is reduced for maximum efficiency.
Time and material are also better compatible with agile methods for project management. This model is very flexible and allows staff scalability by taking on additional developers for the project (if needed) without sacrificing the quality.
What are the risks of both approaches?
Both time and material and fixed cost bring some challenges to the table. In fixed price, although the price for the core features is specified in the agreement, all adaptations and additional functionalities are quoted separately by the software team, and some of them can be discouragingly costly. Conversely, this also calls for a very detailed specification to prevent the software house from money loss in case a feature is coded the wrong way.
In time and material, although the margins of the software house are smaller, there is bigger uncertainty about the final cost (especially in bigger, complex projects). Also, because time and material projects may not have a deadline, they seem to plod forever, negatively affecting the morale of the development team. Nobody likes moving goalposts, right?
What can we do?
To get the best of both worlds, your contract could allow a more flexible approach. A mix of fixed price and time and material is a good idea if implemented right. For example, core features could be agreed upon according to the fixed price method, and all the other features as per time and material.
Helping the client prepare a detailed project specification (like we do at Briisk) will make it easier to decide between the two approaches. We like working to time and material ourselves. It even makes sense for us to sit down with the client for a few hours of free consulting. We make them realise how much work would be needed to write a detailed specification for a fixed price contract.
Alternatively, we offer a possibility to divide the project into smaller “sub-projects” and deliver them as time and material. By doing so, we make time and material attractive to the client, too.
Making the right decision between fixed price and time and material is important to the overall success of the project, and a wise choice should be in the interest of both the client and the vendor. Good luck!