Fixed Price vs Time and Materials
The way you choose to organize your relationship with the development team can significantly affect your work. There are various type of contracts that you can expect from a development studio. Some give you more control and responsibility, others can minimize your risks and involvement but make the quality unpredictable.
I reviewed two pricing methods normally used by software development studios: fixed price contracts and so-called “time and materials" contracts. So, let's see closer how they work.
1) Fixed Price Contracts
Fixed price contracts involve the evaluation of the project, detailed development planning and further work on the established arrangements.
Unchangeable parameters are scope of work and price.
Low flexibility. The changes are quite painful.
Risks are on the studio and performers.
Attitude to new information is negative on the part of the performer
The studio makes evaluations, issue an invoice, receive the money and starts to work. It might look ideal for the studio scheme, but there is always a “but”! In fact, the studio is experiencing greater risks. It commits to present the finished project for a certain price and has planned it completely. If the project is done earlier, then, it means the ordering party has overpaid. If later – the performer incurred losses. It is necessary to assess everything accurately, but it is simply impossible at the initial stage of the project.
With a very high probability, the client will want to add or remove something during the development process. What does it mean? Correctly, the adjustment of the plan, the new "firm agreements", which again can be broken due to the new ideas.
It is suitable for the customer:
When money does not belong to him/her and the quality of the result is not so important
When there is a strict technical enquiry, which no one will ever validate
When one needs the illusion of controlling the process
Cons for the customer:
Each innovation needs to be additionally negotiated. The performer will not be very happy to receive news about the new functional (he has the right for it). When, as a result, the consent is found, you will have to make updates to existing documents or create a additional contract, assess everything once again.
Fixed Price as a strategy to eliminate the financial risks of the client leads to even greater risks. The client puts himself in a certain framework and deprives him of flexibility, at the risk of eventually receiving the wrong product that is out of interest to his audience.
The performer includes risks into the cost.
2) Time and Materials
This model of financial relations was invented by the studios to reduce their risks and increase the flexibility of development. This is the payment for the hours actually worked by the executor.
This type of contact does not exclude the evaluation of the project, but here it plays a rather decorative role and simply helps to understand how much time it will take for a project without imposing restrictions.
Unchangeable parameters: Quality
Variable parameters: Scope of work, price
Flexibility: Maximum. The client can change anything in any scope of work. Changes are made at a faster rate.
Risks: On the client (after all, it does not matter to the performer how big the project will be)
Attitude to changes: Positive. Growing scope of job means increasing the costs. In other respects, there is practically no difference.
This is a good way for a customer to take the project more serious, to design and to think about innovations before, not after. After all, every addition will now affect the budget. In general, it's a good way to discipline the client, which is a good advantage for the studio. By the way, in most cases, the work on Time&Material is (10%) cheaper for the customer, because the studio is not burdened with so many risks.
It is suitable for the customer when:
The quality of the product comes first for the customer and there is no fear to spend more resources than planned
It assumes flexible development methodologies, for example, SCRUM
There is no clarity on what should come out at the end (with some clients it's better to work for T&M for safety reasons)
The performer has extensive experience, a strong team, and is prone to transparency
It is not suitable when:
The project is very small
The plan is very well thought through and any changes are unacceptable
There is no trust in the performer
There is no trust in the customer
The budget is limited
When mentioning the Time and Material type of work, the question often arises: "Isn’t it tempting for the company to work longer to get more money?" In fact, this is very controversial. This way of pricing on the contrary allows you to build the development process for the contractor flexibly and do not erect walls before the customer. A good performer is interested in the right result and keeps the processes transparent. It's another matter if the customer is a tyrant. In that case, yes, this contract can ruin him. Otherwise, it would have been a loss for the studio.
The downside is that the client is often not prepared for such a contract model and takes it hostile. With the fact that the same work of a lawyer or a consultant with an hourly rate is perceived normally. Well, these are the problems of the maturing market.