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Fixed Price vs Time&Materials – How To Make The Right Choice?

Before you start working on creating a project or even a small revision, you will have many questions: who to work with, how much it costs, where to start? Choosing one of the Fixed Price or Time&Materials interaction methods with the developer company will help answer many questions. This will be discussed in our article.

 

The consequences of an incorrectly chosen interaction model can be different: from overspending the development budget to the release of a low-quality product. To understand which contract is best suited for your business tasks, consider the main characteristics, advantages and disadvantages, as well as examples of tasks and cases.

 

Spoiler: there is no single answer about which is better.

fixed price или Time&Materials

What isFixed Price and Time&Materials

 

In the Fixed Price model, you negotiate and fix the amount that you are willing to pay every month for the implementation of the project. And also fix the date by which the development should be completed.
According to this scheme, the amount you pay includes everything: the development itself, the correction of errors, the necessary specialists. It would seem simple and convenient. But before you start you need to spend a lot of time planning. You must understand the requirements for the final product, its capabilities and performance down to the smallest detail.

The Time&Materials model  here you pay for the hours of work spent on the implementation of each stage of development. The cost of an hour of work of each specialist is fixed, but the terms are not.
With flexibility in cost and timing, you can adjust requirements and areas of work, replace or add features. But this model requires you to actively participate in order to get clear results.

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When to Choose Fixed Price and Time&Materials

выбор

You should choose a Fixed Price contract when:

  • The development budget is strictly limited
  • You have a deadline
  • You have clear requirements for the final product and you have expectations from developers
  • Product requirements will not change during implementation
  • Improvements on the project are small or is this the MVP version of the product
  • You don’t have time to meet with the team
  • You can transfer all control to the development team

You should choose the Time&Materials contract when:

  • The project is a complex and long-term (for example, a startup)
  • Product requirements are dynamic and subject to change
  • You have only a basic description of the product, the full scale of the project is not known
  • You need full control over development
  • You need flexible conditions for development
  • You want quick start of development, without developed technical specifications

Main advantages of FP and T&M

Key Benefits of the Fixed Price Model

The final cost is known. Since the cost is written in the contract, you will know exactly how much you will pay for each stage. The risk of overspending the budget is almost impossible. This gives you more flexibility in planning and managing the costs of the entire project, not just the technical implementation.
Implementation is right on time. Knowing the amount of work required, it is much easier to estimate the completion time. In addition, the development team can help you adjust final release dates. Thus, with clear requirements, you will get the result by the right time.
You don’t need to control every process. Before the start of development, you have already determined all the details and recorded them in the TOR, so you can entrust the process to the developers, and minimize your participation.
Transparent stages of development. Thanks to the planning stage and well-developed TOR, you will know when and at what point certain functions will be implemented. This means that planning other business processes will also be easier. For example, launch an advertising campaign for new functionality at the right time.

Key Benefits of the Time&Materials Model

Flexibility and quick response to market changes. In the process, you can decide in which direction to develop your project. Depending on market conditions, you can rework some parts of the project, add new features. And if an unforeseen problem arises, then shifting the deadlines and adjusting the work schedule will not be a problem.
Quick start of the project. To get started, you do not need to spend time on the preparatory stage and careful planning to develop TOR. It is enough to decide on the team and the minimum viable functions of the project.
Opportunities to test ideas and results quality. Through continuous iteration, you can quickly receive and process product feedback from your customers. Having created, as a result, a project that is in demand on the market and easy to use.

TM and FP

The main disadvantages of FP and T&M

One of the weaknesses of Fixed Price is its lack of flexibility. Any sudden changes in the project, even if they are justified by market requirements, require additional costs. Changes and consequences are the responsibility of the customer. And this applies not only to monetary costs, but also to time. Additional scope of work should also be described and agreed upon. It will also take time to check the code.


How to avoid: Take more time to prepare. Carefully study the niche and all kinds of documentation. Create a work plan, setting out opportunities for expansion and contingencies.

 

The main disadvantage of working with Time&Materials is the lack of budget control. This means that there is a risk of going beyond the expected value, and then the price will be higher than the value of the product.
In addition, the success and duration of the project directly depends on the involvement and participation of the customer in the project. Unscrupulous developers can deliberately delay the implementation process.


How to avoid: set an upper spending bar or fork at various stages. Use convenient project management methods, Kanban, Scrum, as well as performance monitoring systems for the finished resource (New Relic, APMinvest and others). Ask for detailed reports on each stage of the project.

3 questions to decide how to work

In general, these two pricing approaches in development can be compared to repairing a car.
Let’s say you want to prepare your car for the winter season. You need to: change tires from summer to winter and change the oil. The car service will be able to tell you clearly how much it will cost and when you can pick up the car.
Moreover, you can choose a suitable car service that will provide the most favorable conditions for the price and term. This is Fixed Price.

And if you decide to upgrade the car and make it a racing car, then in this case the work will be based on the principle of Time & Materials. The car will need to pump the engine, strengthen the suspension. Perhaps this will be enough to participate in street racing. Or maybe you need to improve the aerodynamic performance and decide to do it later.

We suggest answering 3 questions to make decision easier for you

1. What is more important: process control or development budget?

  • If you have little flexibility and you are strictly limited in the budget, then it is more reasonable to work out the MVP version of the project and draw up clear requirements for its implementation. In this case, choose the Fixed Price model.
  • If it is important to get a product that best meets the needs of the market, you want to test versions and create a unique project, choose T&M (Time&Materials).

2. How are decisions made: before the start or in the process?

  • If all the tasks and the direction of the business were determined at the beginning, you know what you want to get in the end, choose FP (Fixed Price).
  • If at the start there are many unknown derivatives, for example, there is no complete description of the service, possible payment methods, registration, etc. For the implementation of additional functions, the T&M model will be convenient.

3. How urgent is the project to be implemented?

  • If you are ready to spend time on analytics, describe all project documentation, risks and requirements – FP.
  • If the project is voluminous, you do not want to waste time or there is no way to describe the full technical requirements for the project – T&M.

Case studies from Cart-Power

More and more companies provide IT outsourcing services, while offering various options for interaction. When choosing a pricing model for your project, you should take into account all the strengths and weaknesses outlined above.
There is no clear answer that one model is better than another. Each way of interaction is suitable for its business tasks. Below are examples of where we used the Fixed Price and Time&Materials models.

Fixed Price

Driada Sport is a large sports equipment marketplace. For 6 months of work on a fixed payment, we expanded the functionality, carried out work on seo-promotion, added several design solutions.
All customer requirements are recorded in the Technical Specification, with clear deadlines and the cost of specialists who will be employed on the project. Manages everything project-manager. He also sends project reports once a month, and also maintains communication for productive interaction once a week.
We traditionally record all tasks in HelpDesk.

Time&Materials

For the EventTop company, we developed a turnkey marketplace, where:

  • Partner companies provide services for organizing events, catering, delivery.
  • Buyers, in addition to the usual placement of an application and the purchase of goods, can book premises, equipment, and hire staff.

Thanks to the well-coordinated work of the project manager, developers and testers, the project was implemented from scratch in 8 months.
We support customer feedback in any convenient way once a day, but we record all tasks in HelpDesk. For the effective implementation of the project, it was enough to send reports once a month.

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We'll develop a marketplace on CS-Cart

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