Time and Material model vs. Price fixing

No matter who you are – a software developer or a client– you clearly understand that you cannot rely only on the spoken agreements during the work. You need a contract that satisfies both parties: customers and software providers. Often there is a big problem to choose an appropriate pricing basis. And there are two main options:

1) a time and materials contract;

2) a fixed price contract.

So, what is time-and-materials? And what is price fixing? Which of these contracts will have benefits for a buyer and a provider?` To find it out, let`s have a closer look at the main features of both contracts.

Time and material contract

This is a type of a deal when a client agrees to pay a certain amount of money per hour plus other expenses on necessary resources.

Characteristics of a time and materials contract:

1. Fixed: quality
2. Variable: scope, price
3. Agility: high (changes are acceptable on all stages of a project)
4. Risks: especially for a client (as the size of a project has no sense for a provider and the bigger the project is, the more the payment will be)

Time and materials is a good way for a client to think over all the project`s details at each stage since even a small change will reflect on the total budget.

The majority of customers does not have a clear plan for the final project. So, after a project is kicked off, they unite their ideas, desires and concepts with technological expertise of a software development providers. Finally, altogether they have a deeper understanding of a final project.

Time and material contract is appropriate when:

• Quality is at the first place for a client, and he is ready to pay for all the necessary resources to make a final project perfect;
• There is no a clear vision of a final project;
• A software provider is highly experienced and is liable for transparency.

Speaking about time-and-materials, there is a significant risk for a client if a software provider pretends to work, but to pass the time. And so, he will earn more money. Nevertheless, a time-and-material contract helps to create an agile development process. A safe and highly proficient software developer is interested in project`s success, so he keeps the whole working process transparent.  Most clients are not prepared for time and materials contract and have no trust to providers, but at the same time, they accept, when lawyers or consultants do their work and are paid per hour. However, these are the problems of the growing IT market.

Time and materials basis is more agile. And a client can be sure that the final result will fully meet his expectations. Due to this pricing basis, a client has control over the whole process from the deliverables to the budget.

Fixed price contract

This contract is applicable when both the price and the scope of work are set in the Statement of work, and the terms cannot be changed without an additional agreement from both parties. Price fixing refers to evaluating a project, detailed development planning and further work on set arrangements.

Characteristics of price fixing:

1. Fixed: scope, price
2. Variable: quality
3. Agility: low (changes happen not so often and not so easy)
4. Risks: mostly for a software development provider

Fixed price contract is mostly beneficial for a client than for a software provider because the last one has high risks: he is obliged to finish a project at fixed price, and he has already planned everything. However, the project may be completed earlier or later. In the first case, a client, perhaps, will overpay, and in the second case, a software provider will bear losses. That is why each detail of a project should be counted and perfectly planned – and this is not so easy to think about and examine each small detail at the first stage of project development. A client is likely to make changes and add something new to the project during the working process. And what does it mean? Right, new agreements, and as a consequence – new risks.

Fixed price contract is appropriate when:

• A client knows exactly what he wants and he has planned everything, and will not accept any changes;
• A project has a very small scope;
• There is no trust between a client and a software provider;
• Budget is limited.

Price fixing as a strategy of lowering risks, in fact, leads to the bigger risks: a client builds up a border and deprives himself of agility. By the way, the final project may be not so popular with the audience. However, fixed price contract gives a predictable scenario of prices or services and offers stability for both parties.

But before you make an official agreement, think about all the pros and cons of both contracts and choose that one, which meets not only your expectations but also provider`s. Because if everything is okay, then the work on the project will be interesting and exciting.