Time and Materials vs Fixed Price Or maybe Hybrid? Which billing model to choose for cooperation with a software house?


We are upfront on the amount of budget that we have consumed and the progress we have made towards completion of the project. This is unrealistic, as it very difficult — almost impossible — to know everything that will affect the project at the very beginning of a project. Also, it makes it difficult for the scope to change over the course of the project as new information becomes known that helps us to create a better software product. Both billing models have pros and cons, but it’s basically the choice between predictability and flexibility (T&M). T&M is especially advantageous in long-term projects when it’s almost impossible to plan every action before the development starts.

Fixed Price Model Vs Time And Material Approach

Now you know what to expect, depending on the model you are recommended. The starting point is the analysis, which we usually perform with the client in the Product Design Sprint formula. A limited possibility of influencing the process after the scope is accepted. However, at some point, it becomes crucial for you to decide in what way are going to pay for the provided service. Setting a fixed price looks like a perfect option at first.

What is the fixed price billing model?

It means you are protected from extra expenses after making a deal. If you are looking for a true partnership Belitsoft company might be the best choice for you. They have proven to be most reliable, polite and professional. The team managed to adapt to changing requirements and to provide me with best solutions. One of our internal engineers has commented about how clean their code is.

The Time and Materials model allows for greater flexibility in terms of the project’s scope. Even if you start your project without a definitive plan for how it will be completed, this pricing model allows you to progress the project and quickly respond to changes on the market. Read on to find out everything you need to know before you start negotiating with a software development company that will be responsible for realizing your project. Changes in project scope resulting in change management are likely to occur, even with strong and highly detailed scope definitions up front.

Fixed Price Model Vs Time And Material Approach

This means that each subsequent stage can be pursued only after completing the previous one. The following outline shows the differences between the agile and the waterfall approach. Do you think about building a reliable product with the smallest risk and reasonable budget at the same time?

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The requirements for the minimum viable product are defined at the start. Also, the requirements may evolve during the software development process. In this model, a client and development team define milestones iteratively, i.e. the next one is discussed and planned after the previous one is completed.

Time and Material Contract doesn’t bind you to freeze all your requirements at the very beginning. Projects that anticipate a future change in customer behavior or business processes want to keep the scope of their projects flexible. The whole project is divided into smaller tasks that each have an estimated time, workforce, and cost. When you agree with the price quoted, the development team can start immediately. During the project, there will be several meetings with the team during which you can add suggestions and ask for modifications.

Fixed Price Model Vs Time And Material Approach

You can evaluate the results and make a decision to stop the work if you are not satisfied with the skills/quality/communication. Our experience shows that clients with a fixed budget (are you one of them?) tend to choose the Fixed Price solution, even if the project compliant with the requirements would cost more. They want a guarantee that they will not exceed their budget. It may happen that https://globalcloudteam.com/ you will find defining all project requirements at the beginning of cooperation difficult. Adding new features at a later time may force the supplier to reduce the specification, for the price to remain at the original level. So, it comes down to a “quid pro quo” situation, which is never comfortable neither for you as a customer nor for the supplier who wants to deliver the result you expect.

The only way to deal with this risk is to manage it, and the best and only tool to do that is the proper requirements’ management. If a vendor is falling behind a delivery schedule, the team can be ramped up, or development speed increased in other ways, if necessary, to meet the delivery deadlines. However, the same can be achieved with a T&M contract when working towards a milestone in a release or delivery plan. After all, a T&M contract often only defines the daily rate and total budget with sufficient flexibility in budget burn rate while working towards delivery goals. I don’t like fixed-price contracts, or at least not in my industry – software design and development.

If you’re still wondering whether Time & Material is the best solution for your project – drop us a line. Well, the biggest issue, which I have witnessed all too often, is to do with the mentality behind a fixed price approach. And while this might be true for when you order a pizza, this is never the case when you order custom-made software. With this newer type of model, production or services are not set as a fixed price as they are in the alternative. The fixed hourly rates are the only costs set in stone for this mode, and potentially some material costs.

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According to this approach, a development process is divided into several distinct stages, which flow consistently. You can’t move to the next one if the previous is still undone. Having worked with Belitsoft as a service provider, I must say that I’m very pleased with the company’s policy. Belitsoft guarantees first-class service through efficient management, great expertise, and a systematic approach to business.

  • You can be sure that the product will get to the market right when you want to.
  • It is you who controls the course of work and verifies the effects.
  • We have been working for over 10 years and they have become our long-term technology partner.
  • Hence, it is important to align your development approach with the right pricing contract.
  • A client doesn’t know beforehand how much time and money the development of each piece of functionality will take.
  • This is unrealistic, as it very difficult — almost impossible — to know everything that will affect the project at the very beginning of a project.
  • ✅ You can adjust the level of your managerial involvement.

However, if a project requires a different approach, the fixed-price agreement isn’t off the table. Later on, if you find the result of our work satisfying and you need to create a fully-fledged and feature-rich app, we can shift to a Time-and-Material type of billing. It’s difficult to determine the exact scope of a project right at the start.

Time & Materials and Fixed Price contracts in software development – introduction

In fact, in a lot of cases, this newer, more flexible type of contract might actually be a lot better for a lot of projects or individuals. A fixed price contract requires stable requirements and a predictive process. This ensures that the development methodology can be planned and monitored on the progress. A predictive process helps lay down the number of people, resources and timelines of the project.

Before choosing a fixed-time contract you need to schedule a meeting with the development team first, during which you will discuss all of the project specifications. These must be crystal clear to both you and the developer, so you need to plan down to the finest details. Otherwise, it might be that the final product isn’t exactly what you hoped it would. What’s more, there’s a “set in stone” deadline by which time the client is “guaranteed” to be presented with the ready product. And with a detailed plan including goals and milestones, they can easily track the progress of the project. There’s no need for the client to supervise the project either, so everything sounds clear and predictable.

Fixed Price Model Vs Time And Material Approach

Fixed price and T&M are two models for pricing work in the software development industry. As a client or software product owner, the idea of fixed price or fixed cost is very attractive because it seems like a lower risk option. fixed price vs time and material But the best pricing model really depends on the type of project or work you are doing. Let’s have a look at the T&M meaning and what is a time and material contract. In this typically agile approach, work takes place in sprints.

Time & material limits risk

When you decide to create or develop software, or accelerate its testing, your resources may prove insufficient to do it on your own. While some may think of it as a plus, being unable to make changes and improvements is definitely a drawback of a fixed-fee agreement. There is always a chance of increasing expenses during the period of development. And Scope Based Model will bring the expected results only if you trust your developers and have established business relationships with them. You can clearly determine your needs and expectations and explain them to software engineers. Thus, you have to outline the user’s path appropriately and understand how to write user stories.

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We have been working for over 10 years and they have become our long-term technology partner. Any software development, programming, or design needs we have had, Belitsoft company has always been able to handle this for us. Belitsoft has built a team of 70 QA engineers for performing regression, functional, and other types of software testing, which cut costs for the software cybersecurity company by 40%.

Have an idea? Let’s work together

The mixed or Proof-Of-Concept approach has proved to be far more useful when it comes to checking the quality of a new vendor. In this case, you have your vendor deliver a simple and small prototype while researching for the biggest technical risks and proving the technical ability to build the project as planned. This allows you to verify the idea itself, the vendor team skills and approach, and see if the chemistry between your team and theirs is right and will set your product up for success. T&M works best when you want to immediately start implementing a complex and long-term project, or you already have a development team but need additional resources. This will give you great flexibility in adjusting the project to your evolving expectations. Although it may seem more expensive, in this case the costs of a T&M project will be lower than that of the Fixed Price model.

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Belitsoft has well-versed specialists with years of experience in fixed price projects who will take on this stage. As a result, our dedicated team has scaled up to 100 testers and developers on board, providing a definite increase in velocity. Belitsoft has helped attract new clients, increase revenue, and save 40% on development and testing. The reason why a fixed price agreement needs a well-defined scope that is limited in size is because it is impossible to estimate a true and fair price when there are unknowns. When you’re thinking of how to pay for your product don’t rush.

We calculate our costs basing them on the number of hours put into the project and tangible effects of our work. We believe that in the process of delivering innovative products other existing methods of collaboration don’t deliver expected results as well as those implemented by our team. In the Agile approach – recommended in software development – the team regularly meets, exchanges insights, and constantly optimizes the application. With a fixed price contract, there’s no point in discussing new ideas because you can’t go beyond the scope, anyway. This model also provides you with full cost and project progress transparency. As an engaged Product Owner, you’ll know what team is up to and can verify documents such as invoices and timesheets to make sure that the calculations are correct.

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