Time and Material Contract vs Fixed Price: Choose the Right Pricing Model for You

If you’ve been nurturing an idea to build a digital product, one of the available options is hiring a development team to get started. However, what do you do if you don’t have a continuous funnel of projects, and it’s only one-time web app development? Hiring an in-house team of developers will most certainly be an overkill. Considering the overhead costs associated with hiring staff, it will pay you off neither with time gains nor money savings. 

In cases like this, outsourcing development to a remote team is often much more beneficial by engaging in a contract with a team on the terms that best align with your business goals. Not sure which of the pricing models best suits your project? Don’t fret – you’ve come to the right place. In this article, we’ll look at the two most popular types of billing models – time and material and fixed price – and provide detailed comparisons so you can make the right choice. 

Why Is It Important to Choose the Right Pricing Model for Software Development?

Essentially, the choice of the billing model determines the success of web development. By choosing a suitable model, you can take control of the development process and prevent unnecessary delays that can significantly increase your overall bill. Considering what software developers charge per hour, the potential savings could be thousands of dollars! In addition, you can reduce many of the risks associated with software development, such as the late completion of the project, the need for significant rework in case of any changes, hidden costs, and much more. 

A pricing model is a strategy that lays out the terms of the partnership by describing how the money will be paid, what time frame the project will take, how much work will be done at each stage, and what will happen if any unexpected obstacles arise, be it from the client side or from the development team. In other words, this is your guarantee that the project will be completed on time and will match your expectations.

What Is a Fixed Price Contract?

Fixed price contract or firm-fixed price contract (FFP), as the name suggests, is a type of collaboration model where the development cost is discussed and approved before the project starts and doesn’t change over time. The appeal of this model lies in its ability to predict the budget, coupled with an established timeline, making it one of the most popular collaboration models for partnerships. Basically, opting for the fixed price model saves you from budget overruns and ensures that the project will be delivered on time. 

However, like any model, it comes with its share of drawbacks. One significant challenge arises when developers, realizing they may struggle to meet deadlines, hasten the completion of the project to avoid penalties. As you can guess, they often do it at the expense of quality. Additionally, the cost estimation for a fixed price is usually set higher than the actual expense. This is done intentionally to include a buffer to account for unforeseen circumstances, ensuring that the project remains within budget even if unexpected hurdles occur. 

How It Works

Here’s how the fixed priced fee model works. Once you’ve found your vendor, you’ll meet over a video call or in person to discuss the project details. At this stage, you should have all the requirements ready, as the team would expect you to set the price for the entire project. 

Next, you and the team create a plan and document the project scope, specifying the features and other relevant details. This documentation becomes the basis for your agreement, after which the development can commence. 

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What Is a Time and Material Contract? 

A Time and Material (T&M) contract is the complete opposite of the fixed-price model. Under this contract, you’ll be charged for the actual time spent on the project scope. Along with development efforts, you’ll also need to reimburse the cost of tools, applications, and any materials used during the development process (hence the name). 

With the T&M, development firms usually break down the project into several tasks and estimate each separately. If you’re happy with the sum and hours required to complete the work, the team gets down to the task’s implementation. In this model, software engineers strive to deliver the best possible outcomes to ensure you don’t change the contractor and continue collaborating with them. 

This type of contract is, perhaps, the most flexible, making it suitable for all development methodologies, whether you’re following the Waterfall model or Agile, etc. However, there are a number of things that need to be taken care of to avoid legal complications. Let’s take a look at themю

  1. Put in writing how the tasks will be coordinated and what the procedure will be when you need to make any kind of adjustments. For example, you may agree to give and accept tasks every 2-3 weeks and use Skype to communicate with the PM. Ensure that the agreement provisions are flexible and easily adjusted to accommodate evolving business needs.
  2. Determine payment milestones. This will help avoid tasks rotting in a vicious circle of continuous corrections. Most often, companies use the end of each sprint to review the completion of tasks and pay for the progress. It’s also a good idea to decide on the payment method at the beginning of the project to avoid any inconvenience in the future. 
  3. Discuss how the time will be spent. It’s important to estimate how many hours the team will need for each sprint (or any other approved period of time) and include provisions describing what to do in situations where the development team exceeds the initially committed time. 
  4. Include an appendix describing the price review process. Having a price review process is beneficial for both parties. As a client, you can save yourself the trouble of finding new contractors halfway through product development if your team requests a price increase. Your team, in turn, will clearly understand the steps that need to be taken before their hourly rate can be reviewed. 
  5. Keep the documentation process in place. Both you and your team should maintain records of hours worked, tasks completed, and materials used. This documentation serves as a transparent record of the project’s progress and can be invaluable in cases of disagreements or disputes. 
  6. Allow yourself to exit the contract at any point in time. If you’re not happy with the development team and how they do the job, you should have the right to terminate the contract unilaterally, freeze it, or request a change of team members. This procedure must be outlined in the agreement before you start a project. 

How It Works

The principle of the time and materials model is polarly different from FFP. When you get together with the development team, you don’t necessarily have to have all your project requirements formulated. You can start with a pretty raw idea and refine it as you go. What you do in the first meeting is discuss the project scope and establish an estimated timeline for the project, along with resources that may be necessary to complete it. 

Further down, the project is divided into several parts, and each is estimated time- and money-wise. This way, you can focus on the features with the highest priority and arrange the rest in a manner that best aligns with your business goals. Typically, the development team works on a fixed day rate during the confirmed number of days. When the task is ready, they demonstrate it to you, and you can either accept it and pay for the time spent or ask for corrections if you’re not 100% satisfied with something. Obviously, additional time required for corrections will need to be paid for separately. 

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Time and Materials Vs Fixed Price Billing Models: Key Differences

Now that we’ve covered the peculiarities of the two types of contracts, it’s time to dig deeper and check how they stack up against each other. This will help you get a better grasp of their highlights. 

Time and Material Contracts vs Fixed Price Model

T&MFixed Price
The scope of workCan be adapted to evolving business requirements throughout developmentDetermined at the beginning of the project
BudgetThe payment is made after each agreed-upon increment of work deliverable and can be reviewed at any point in timeThe payment is made after the final product is completed and accepted
Level of involvementThe client’s involvement and feedback is needed throughout the entire development processThe active involvement is required only at the initial stage when discussing the project scope and requirements
TimelinesThe timelines for the project are often not clear. Instead, the team defines the timelines for iterationsThe timelines are established before the project starts, and the development team must adhere to them strictly
ChangesChanges can be introduced easilyAlthough this model can accommodate changes, it demands a regeneration of a project agreement, leading to significant delays in the delivery of software solution

As you can see, these models differ quite substantially. However, each of them has its own strengths, making them best suited for different business scenarios. 

Fixed Price vs Time and Material Model: Pros and Cons 

If you’re still unsure which collaboration model to choose, the next section is for you. Below, we’ll walk you through the benefits of materials and fixed price contracts, as well as the challenges that can arise along the way. 

Advantages of a Fixed Price

  • Time and budget predictability. The biggest appeal of an FFP model, making it so popular among companies outsourcing IT, is that it gives you a clear idea of the time and money that are going to be spent during the development process. Once the price and timeline are approved, they usually don’t change unless there’s a need to introduce a significant change into the scope of work. This predictability allows businesses to make better financial decisions and forecast their revenues more precisely. 
  • No upfront payments. The other advantage of FFP contracts is that they don’t require any upfront fees. You only pay for the work once the project is done and only if you’re satisfied with the end result. 
  • Transparency. A fixed-price collaboration model ensures high transparency for all parties involved. Both the client and the software development company know exactly what type of product needs to be produced, how much time has been allocated to the project delivery, the amount of work that needs to be done, and how much money will be paid at the end of the process. 

FFP Challenges 

  • Not flexible. The biggest challenge of the FFP model is that it’s not flexible. Suppose any surprises creep into the project, which isn’t a rare occurrence when it comes to software development. In that case, you won’t be able to do much about it, especially if the agreement demands adhering to the agreed-upon budget. Even if not, the whole project would need to be put on hold to review the requirements, leading to delays and significant cost overruns. 
  • Not much control over the project. Once the project has moved from the planning phase to the actual development, you don’t have much control over the delivery of the product. The development company will stick to what’s been specified in the fixed price agreement, and you won’t be able to consult with them or introduce changes. 
  • Long preparations. Another drawback of this type of pricing contract is that it doesn’t allow you to get started immediately. You’ll need to spend a few weeks to a couple of months preparing and reviewing the agreement and outlining the project’s new specifications in detail.

Advantages of a Time and Materials Pricing Model

  • Flexibility. One of the biggest advantages of a T&M contract is its flexibility, offering companies unlimited freedom to revise their projects and bring changes to them without wasting time on contract renegotiation. Basically, it even allows you to change the entire workflow if project requirements change and demand a new approach, something not possible with FFP. 
  • Speed. Since the time and material agreement isn’t set in stone and can be adapted during development, this collaboration model allows for a virtually immediate start. It doesn’t mean you won’t need to make any cost estimate beforehand. Like with any other model, cost estimation is a necessary step. However, with T&M, it’s much easier to adjust project specifications and add details as you go.
  • Simplicity. The other advantage of T&M is its simplicity. Essentially, you pay for the resources that were used at each stage of the project to complete it. The more time and effort are put in, the higher the final cost. 

Challenges of a T&M

  • No clearly defined timeline. One of the biggest concerns with this billing model is that there are no predetermined deadlines, leaving everyone guessing how long the project will take and what the outcome will be.  
  • It can be costly. As project requirements may change, the final price may balloon and go beyond what you originally planned to invest in software development – this is the price you pay for flexibility and customization.  
  • Proactive involvement. Opting for the T&M means spending a lot of time in meetings to make decisions and approve changes. Unlike the FFP, under this contract, developers can’t proceed to a new portion of development without achieving a green light from you first.

When to Choose a Fixed-Price Contract?

There are two main scenarios where a fixed price contract becomes an optimal choice. One of them is when a project has a clearly defined scope, and there’s little chance any major modifications may be necessary throughout development. Most often, it’s used for small projects that can be split into distinct milestones with specific deliverables. Another one is strict budget constraints. If you have limited resources and cannot afford for the cost of the project to vary, you should go for a fixed price model to reduce financial risks. 

Some examples of projects that are best to build using FFP include:

  • MVPs;
  • Prototypes;
  • Some basic features;
  • Any other low-complexity projects, as well as project management models that provide predictability, such as waterfall, iterative, or spiral. 

When to Opt for Time and Materials?

When a project has dynamic requirements, and it’s difficult to determine its scope and duration before the work begins, choosing a time and materials cooperation model is the best solution. Additionally, if the size of the project is most likely to undergo modifications in response to market changes, it will be beneficial to work on a T&M basis, which offers flexibility in the size and time spent on a project. 

Here are a few more examples where the time and materials model works best:

  • Mobile applications and website development;
  • Projects requiring incorporation of advanced technologies like ML and AI;
  • Complex projects with no clearly defined duration;
  • Long-term projects that anticipate changes in the market.

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Fixed-Price Model or Time and Materials Contract?

To make it a little easier for you, we’ve put together a list of questions to help you decide between fixed price and time materials models. The answers to these questions will give you an idea of which of the two is the right pricing model for your business needs.

  • Can you describe in detail what kind of product you want to build? If the answer is no, then you should opt for a time and materials model. 
  • How much time and resources do you have? For projects with strict timelines and budget constraints, a fixed price would be the best billing model.
  • How high is the risk of unforeseen changes after the start of the project? If the risk is high, it’s best to go with time and materials. If not, opt for a fixed price model. 
  • Does your project involve ongoing development and evolving features? For dynamic projects, T&M proves to be the best choice. 
  • How much time can you dedicate to project management? If you don’t have time to participate in meetings and proactively collaborate on decision-making processes with a development team, an FFP model would be more suitable for you. 
  • Does your project follow specific project management methodologies, such as waterfall, agile, or any others? Time and material contract works well with agile and iterative projects due to their adaptive nature, while more structured methodologies, such as waterfall, align best with FFP. 

How to Choose a Reliable Development Team

No matter which model you choose, the key ingredient of success is the team you work with. By hiring the right people, you can avoid many of the pitfalls of both fixed price and time and materials models, such as compromised quality due to the desire to complete the work fast or endless adjustments and corrections that make an already lengthy project even more time-consuming. Experienced development teams that have been working with different types of billing models know how to navigate the common challenges and offer their clients the best conditions for partnership. 

If you’ve never outsourced before, the following tips may come in helpful for finding the right team for your project:

  1. Expertise and Experience

The first step is to ensure that the team you want to hire has relevant experience in the specific technologies and framework you need for your project. Look for a team with a proven track record in handling projects similar to yours. 

  1. Portfolio and References

Make sure to review the team’s portfolio to assess the quality of their previous work. This will give you clarity on how good the team is at delivering quality work and give you an idea of the niches they are well familiar with. Additionally, seek references or case studies from past clients to understand how satisfied they are with the team’s work. Ensuring that the team delivers on commitments and puts their clients’ needs first is very important. 

  1. Communication Skills

Effective communication is of the utmost importance in software development, especially when it comes to outsourcing when you don’t have the opportunity to monitor the team’s operation closely. So, before you jump into signing a contract, ensure that you don’t have any barriers in communication. Developers should be fluent in English to express themselves freely, and there must be a time overlap for both of you to communicate without any obstacles. This is especially crucial when working with a time and materials model that requires ongoing collaboration.

  1. Flexibility and Adaptability

A reliable team should be adaptable to different project management models and ready to work on your terms, regardless of whether you opt for a fixed price or time and materials contract. Moreover, they should have the proficiency to advise you on the model that’s most appropriate for your project. 

  1. Transparency in Processes

Transparency is key to a successful partnership with a software development team. With that in mind, choose a team that’s transparent about their development processes, pricing structures, and any potential challenges. Here, you may want to ask them what they usually do in unforeseen situations and how they deal with tasks that take longer than expected. An experienced team should have a clear process outlining how they handle challenges and any deviations from the initial plan. 

  1. Project Management Tools

You may also want to find out the team’s project management tools and methodologies. They should use modern and efficient tools and have a well-established reporting system to inform you of the project’s progress. 

  1. Quality Assurance Practices

Finally, give preference to the team that has robust QA practices in place. The quality of testing is a vital part of the development process, preventing bugs and issues that could arise from rushed delivery or overlooked details and determining the overall success of the project. 

For example, at QArea, we have a team of 300+ qualified specialists with vast experience in various frameworks and programming languages. Moreover, our quality assurance department is top-notch. We have 250+ physical testing devices, allowing us to test different software products and services across all types of platforms and devices to ensure a smooth user experience without bugs and lags. 

Additionally, our team helps avoid the fixed price fee vs time and materials situation by offering a hybrid model known as fixed price plus. This model combines FFP and T&M approaches to provide financial stability while also leaving room for changes should you need to revise your project at a certain point in time. So, even if you’re not sure which pricing strategy fits you best, we’ll help you choose the right pricing contract. 

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