Usually clients are not familiar with the common engagement models applicable in the software development practices.
Engagement model is an approach through which we engage and build relationships with our clients. Once you decide to outsource software development, the very next step is choosing the right engagement model.
An engagement model in software development helps any company set a profit-making plan and tells about products or services it will sell, tasks with timeline and expected cost.
Do you know which engagement model works best for your project?
Probably yes or no. There is a confusion since you may not be well aware of the intricacies time and material and fixed price model holds.
Time and materials contract example and cost estimation strategy
There are a number of factors for calculating whether you should opt for time and material or fixed price. Project scope, budget and timeline are three core factors apart from others.
In this blog post, we will compare time and material vs fixed price business model so that before starting any project you choose an appropriate software development pricing model.
Table of Contents
Definition, structure and examples: Time and material vs fixed price
Time and material business model
Time and material is one of the agile business models in software development, widely acknowledged and used. A client pays only for the number of resources inducted in a project with the number of hours spent on the project. No matter how long the project completion takes.
Most of you agree that paying for the real work seems fair and justified. This is what time and material involves, regular work updates, payment based on delivered work.
Even after years of experience in software development, we can’t name all possible scenarios evolved with the dynamically changing technology environment and very specific nature of the software development.
Time and material contract structure
The pricing structure of this model is based on man hours of the resources involved along with project requirements which keep on updating as the software/product evolves/develops.
- No. of man hours
- Project scope (always evolving)
- Agile development methodology
Time and material contract involves making the crucial decisions in the beginning so that the product starts out with ‘some shape’ rather than moving in a headless direction.
No. of man hours along with the tasks completed are being paid on a regular basis. However, we do not recommend startups or the ones trying to launch their product in the market to quickly opt for this business model.
Time and material contract example
If you have a project requiring more than 1 year of development time and a cross functional team of 10-20 people, you need a time and material contract.
Also, support and maintenance projects can easily fall into time and material contract.
Time and material contract example, and cost estimation strategy
When should I choose a time and material model?
- Incomplete project requirements/scope.
- Complicated and long term projects with cross functional teams.
- Budget isn’t fixed.
- Requirements keep on evolving/changing.
- Development takes more than 1 year.
- Flexibility, less controlled in comparison to fixed price models.
- Want to pay for the time spent on the project.
- More in control of the project.
Pros and cons of T&M model
-Agile software development
-Retain more control over the project
-Can change elements when needed
-When you don’t have a clear project scope
-Less riskier, you pay for the amount of work done
-Allows adjusting work schedule of the team if any unexpected issue arises
-Very nature is dynamic, flexible
-No strict timelines
-No fixed budget
-Undefined project scope
-Development cost isn’t fix so chances of increasing expenses
-Timeline uncertain since the scope is unclear
-Keeping track of development/workflow
Fixed price business model
A fixed price business model is the one where the project scope is complete and asks for project development and completion with a fixed timeline.
We hate to break it to you with our experience that it’s almost impossible to give 100% accurate project estimates like cost and timeline with a fixed price business model.
Rigid project scope won’t allow clients to ask for changes since paperwork/requirements are followed ‘as-is’ and if changes are being made, extra money will be charged.
Fixed price business model structure
The pricing structure of the fixed price business model is pretty much straight. Clients pay the fixed (decided) amount at the end of the project completion.
Fixed price structure:
- Budget fixed
- Project scope (complete)
- Timeline given/fixed
Fixed price model asks for complete project scope in the very start and no more changes in the middle. We personally think the model is no more opted by clients as this would cause them to pay more rather than save.
Startups, however, can seek benefit with the fixed price model approach. They have to launch their innovative ideas into the competitive market before anybody does. Further, startups can equally seek benefits from the T & M model, it just depends on the software development partner you choose, most of the time.
Contact us if you want to know more about T&M model.
Fixed price business model example
If you have a project requiring less than 6 months or can say 3-4 months of development time BUT with clear project scope, this business model is for you.
Startups or mid-size companies with budget constraints can set the scope and calculate their timeline (as usually they are short on budget).
When should I choose a fixed price model?
- Clear project requirements/scope.
- Clear timeline/deadline of a project.
- Budget is fixed.
- For minimum viable products (MVPs).
- Small scale projects/startups.
- Simple projects, not complicated ones.
- Development time taking 3-4 months ideally.
- Project requirements aren’t changing with time.
- Development team control over the project.
Pros and cons of fixed price model
Fixed price PROS
-Fixed development, project scope is complete
-Development cost is fix, no additional expenses
-Well-planned since the scope is clear
-Faster product development, quick market launch
-Minimum risk involved for client, no extra fees
Fixed price CONS
-Less control over the project for client
-Additional changes costs you extra
-Rigid development (can’t ask for changes during development)
-Planning stage takes time
Why does Phaedra favor T&M model?
If you ask for our honest advice, we suggest time and material business model if compared with fixed price. With years of experience, we have seen clients opting for a fixed price model and later asking for changes and ending up paying more than they expected.
Time and material offers more flexibility with respect to development and gives more control over the project development.
At Phaedra, we use time and material models for almost all of our projects. The reason is simple, the ultimate value it has. This approach has been appreciated by our clients as they can introduce changes, and react to market situations.
T&M is a great pick for long term business partnerships focused on constant development and end-user satisfaction.
For common queries, read a detailed blog on T&M model client FAQs.
We worked on fixed price and time and material models and safely we can say time and material contracts offer more in value and service.
However, sometimes projects may require a fixed price approach. Let’s say you want an MVP with a fixed price model, once your product launches successfully, you can ask for a fully functional app with T&M model. Feel free and reach out, let’s see how we can work together.