If you’re looking to outsource software development, essentially you will find two pricing/ business models i.e. time and material and fixed price. T & M model helps dynamic projects a lot since requirements keep on upgrading/changing where the fixed price model is for projects with accurate requirements/ scope.
Software estimation provides value to both client and the service provider. Clients get information like time required to complete the project and get to know the project budget whereas the provider organizes work and sets deadlines, defines the optimal number of resources, and calculates planning metrics.
Just when the project development is about to kick off, choosing the right type of service contract not only minimizes the risks (associated with cost and time) but also keeps the client and the provider relationship intact and pleasant.
Previously, we covered what time and material contract is and what sort of projects can seek the maximum benefit from T&M model. (link with previous T&M blog)
Considering the fact that 65% of tech projects go past their initial cost estimations during the stages of development – In this blog , we will be sharing time and material contract examples and an ultimate strategy that will help you to always come up with an accurate project pricing.
What is the time and material contract?
Outsourcing agreements are time tested and abundantly used in software development. Initially fixed price model was used a lot for setting the outsourcing agreements but later time and material model gained popularity. Choosing the right pricing model is where you look into company operating procedures, contract requirements and general expenses a vendor has to bear.
Time and material is one of the business pricing models where client/ vendor has to pay for the time and resources being utilized in the project. Most of the time when a client is not sure about the end product and requirements, he opts for the T & M model where he has to pay for the work he asked for, and this suits the client the most.
Long term projects with a dynamic set of requirements are ideal for the T & M model where the project scope evolves with time and is not fully known at the start.
Also, if you want flexibility in changing project scope or can say vary the workload, T & M model works unless a fixed price model where everything is set and decided at the very start.
Time and material contract examples
1- Cross-functional team of 15+ resources, 1+ year development time
Dynamic and long term projects with huge investment usually require more time and resources allocation. In such cases, we at Phaedra Solutions deploy cross-functional teams because requirements are unique and require time efficiency at the same time.
Cross functional teams work like a competitive edge for such projects as these teams are composed of different individuals with different / unique sets of abilities working on one single project. Also, they reduce the overall project management cycle time.
2- 6 months development time, complete scope is undefined
Project scope is critical for successful project execution. Undefined project scope means you get the half-cooked project and may need further development in future.
Some projects may not be as lengthy as 1-2 years but they roughly take 6-7 months and we place such projects in the middle tier.
Flexible development/ agile methodology, 5-10 team members for project scope completion.
3- Maintenance and support projects
Maintenance projects are used for enhancements and defect/bug fixing. Enhancements are usually implemented to boost the current features where standard Scrum practices are used. Whereas defect or bug fixing involves troubleshooting and it must be done sooner than later.
With our experience many clients don’t consider maintaining the app at the beginning and that is a big mistake. Regression tests (sometimes automated), analytical and design documentation, app main flow tests, etc. are some practices we use under the T & M model.
The ultimate software estimation/pricing strategy (works all the time)
If you are not estimating the project/ software the right way there could be many side effects. Clients may have to pay more than the listed budget. Projects get disturbed in their appearances due to unrealistic time and budget constraints. Morale of the development team may suffer negatively if they keep on trying to meet unrealistic requirements.
Now the question is who should be responsible for the estimates?
A person doing the estimates for the project must be someone who has an experience in software development or done estimates before. Estimating the project time and cost is itself a valuable skill, the more you estimate, the better you become.
Clients wish to add all features in one-go. All the features are put in one bucket and they think that they have scaled for the future with a fixed amount of users and servers.
Solution – modular pricing
Acquire a customer and upsell later. This will save time and money both, because the cost of acquisition is too high when you put all features and expect users coming in.
First, don’t put all features in one bucket or for the first launch. Put the basic, most required features in the first launch, later add features in milestones. That being said, put the most advanced features in the last. This would save time and cost.
Sales cycles are long, you don’t know which feature is going to work. And if you put all features in the very start, it would be very difficult to identify which ones are performing well and which ones should be omitted.
Building a healthy relationship with the client is important in custom development. If the client picks the right type of contract, this helps in minimizing the risks and increases the revenue for both the client and the service providing company. Time and material is the most common pricing model in outsourcing, and we recommend opting only if the scope is undefined and if you are afraid to spend extra rather sensibly.
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