Fixed price vs. Time and Materials: choose suitable variant

 
As you are thinking of implementing software development outsourcing in your company’s process, remember about the financial side of it. There are two main payment models: Time and Materials (T&M) and fixed price. Usually, your choice depends on possible:

• economic benefits you are seeking;
• risks you are trying to avoid.

Of course, your choice should depend on the circumstances and needs of your project. Below we tried to compare these two payment models to make it easier.

 

Time and Materials against Fixed Price

 

Fixed price model

You will have a specific project quotation from a vendor. There should be a full scope of work and costs so that project could be finished in time. The main point of the model is to pay for installments as the project is running. All payments are done according to the main events of the project.

Advantages

• Clear budget and timeline. This comes in handy when you have a limited budget and strict timelines. As a rule, you will know how much you need to pay for the project and when it is done.
• Specific results from the project. From the very beginning, you will know what the project is capable of. This way you can adapt a business strategy or create a new one.
• Not much effort in project management. You will do most work only during the planning stage. After its beginning, you will be mostly involved in compliance checks.

Disadvantages

• Slack launch of the project. If you wish to have detailed software technical specifics, you should be ready to wait several weeks or months to get it.
• Difficult to alter the project as it is unfolding. If you decide to change certain aspects of your project, you will need to get detached payments and negotiate concerning alterations.
• Impossible to test the software before it is finished. Even though you manage the work of the development team, you still will not see the actual software before it is finished. Of course, it will cost more if you decide to correct any gaps in the project.

 

Time and Materials (T&M) model

Using the T&M model will help you pay only for the used materials and time for your development for every outsourced staff member. As a rule, all projects that work on this model are Agile-based. You will have monthly reports on the progress and issues of the project.

Advantages

• You will have a project roadmap where you will mark crucial milestones. With that, you will still have the possibility to adapt the work according to your needs. All your decisions on future adjustments can be done from the results of previous ones and analysis of tendencies.
• Quick launch of the project. Software technical specifics should not be as thorough as they are in a fixed price model. This factor quickens the launch of your software development.
• Ongoing quality test. This model provides ceaseless quality tests so that developers could quickly implement any new changes and features. There will be no need to adjust software after it is done.

Disadvantages

• Vague deadlines and budget. When the project is done you might be surprised. There are cases when costs exceed company’s budget. The same situation relates to deadlines. Thus, clients usually try to assess the developer team’s progress with KPIs. This helps with putting the project in certain timeframes after a while.
• A lot of effort in project management. Even if you manage work performed, you still will have to allocate a lot of resources to work with your vendor and offer a quick and constant feed. This will help create an even pace of project development.

 

What should you choose?

 
To make the right decision, take your time to assess these factors:

• Timeline and budget you have or plan to have. Will it be adjustable or not?
• What kind of software vision do you wish to have? Do you have strict requirements or general idea for the final version of software?
• What is the scope of your future project? Will it be on a small, middle, or large scale?
• How much involved you plan to be? Whether will it be on-and-off or constant collaboration?