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Time and Material (T&M) vs Fixed Price. Pricing in Software Development.
- We will introduce the definitions of fixed price and time and material models.
- We will tell you about 5 myths about fixed price agreement…
- and also time and material agreement myths.
- When to use which project pricing method – the main comparison of the two models.
- So…which is better?
First things first – what exactly is fixed price and time and material models?
In simple terms:
- Fixed price: As the name suggests, it’s when you and your software development company agree on a fixed amount for the whole project (or its part).
- Time and material (T&M): It’s when the price you pay reflects the actual time spent by developers working on the project along with any other people like project managers, team leads, etc., their hourly rates, and the resources used in the process.
Both are based on different assumptions and reflect a completely different way of looking at software development projects (think waterfall vs. agile).
In the case of a fixed price agreement, you’re basically buying a product with a single, fixed price. But unless you’re actually buying software off the shelf, you need to remember that’s a tailor-made product, based on your specs and requirements and a detailed scope of work. It’s mostly used by companies working in the waterfall model and never a good idea when you’re agile. And it might work if you have a definite vision and a (very) detailed specification that is certain not to change. With a focus on “might”.
A T&M contract, on the other hand – instead of taking an educated guess – takes into account all the dynamics that go into software development, like changing requirements, upgrades, and probable risks. That’s why most software houses (including ours) favour the time and material pricing model these days, although the fixed price model still has its applications.
At Asper Brothers, we have some strong views on the effectiveness (and ineffectiveness) of both models and definitely favour time & material. Here are some common myths we wanted to debunk – so you’re more comfortable making the call when pricing your next project.
Fixed price agreement
Myth 1: It’s predictable
You know exactly how much you’re paying, and what you’re paying for. So you can include it in your budget and not worry about it ever again. And there are no uncertainties when it comes to the product itself – it’s all you’ll agree on initially.
I hate to break it to you, but the experience of software development teams around the world shows it’s hardly ever possible to give a 100% accurate estimate that’s bound to never change.
Besides, a rigid scope of work is more than likely to cost you more, because any improvements or even bug fixes can be treated as “out of scope” work. It leaves hardly any wiggle room, so in the end, you’re in fact paying more – and probably more than you would’ve paid in the time & material model. And that’s without being prepared for it (because, after all, everything was “fixed”), which might mean a domino of consequences for your business.
Plus, from my personal experience, I don’t think I’ve seen a fixed-price project delivered on time in my career. That’s more like a mythical creature to me.
Myth 2: Everyone understands the vision and expectations
From start to finish. There are no surprises along the way like increased costs or exceeded deadlines. At least in theory.
You wish! There’s no such thing as “no surprises” (apart from an old Radiohead song). It’s super difficult and time-consuming to create a specification that’s so detailed you know absolutely everything. The truth is, you can never know what’s going to change and the risk you’re running by keeping a rigid and strict budget and schedule is that you will end up with a product that’s not up to standards – and not what you expected.
Myth 3: It’s transparent
You know exactly what the software house does and you have tools to measure their performance. You can just leave it to them.
What most software houses won’t tell you is that they add considerable margins to their estimates to cover for potential risks – anything from, say, 15% up to infinity. Some will base a large portion of their project on a ready-made script, making the client pay several times the value of the actual work they’re doing. Sorry folks, but this happens everywhere, all the time.
Myth 4: It’s easy to manage on the client side
You usually have a fixed payment schedule aligned with the stages of the project. This might save your project management team some precious time.
We’ve worked with many clients on many different projects. And what we’ve seen is that the closer the client is to the project, the more successful the project is – and the better for everyone.
Of course, as your software development team, we’re there for you to take the load off your shoulders – which is what you hire us for. But we’ll need to work with you to make sure you’re getting just what you wanted, and that’s the whole point of outsourcing software development. It’s not to “get rid of a problem”. It’s to get support from experts who can help you reach your goal.
Myth 5: It’s cheaper
You agree on a price and that’s all you’re paying, saving you the unexpected costs in case the project runs on for too long.
See above. The problem with fixed-price is that at first glance it looks like it can save you time and money, but these savings are illusory in most cases. Software houses have their ways to hide costs in fixed price estimates, plus are not prepared to handle extra costs that most likely WILL come up.
Time & material agreement
Myth 1: It’s more expensive
After all, with a fixed-price project, you agree on a fixed budget and won’t pay a dime more. And here, you just never know.
I hope I managed to explain it in the first part of this article. Because time & material is by its very nature flexible, the budget and schedule are more negotiable, which in turn means lower risk for both the client and the development company. For agile projects, whose very nature is more dynamic, it’s basically the only reasonable choice you have.
And let me say this again: with a flexible budget, you can accommodate additional improvements or changes that are most likely to be necessary, and for which you’ll have to pay out of a fixed budget anyway.
Myth 2: It’s unpredictable
Things might change many times over and you might end up paying much more than you initially anticipated.
Things WILL change. And time and material agreements don’t (and definitely shouldn’t) mean you don’t have to create a scope of work, initial requirements and specification – and just go with the flow.
But the good thing about them is that you can keep up with the changes and adjust your plans to them – WITHOUT overpaying at the end of your initial plans fall through.
Myth 3: It’s easier to start
You don’t have to have a very detailed specification, to begin with, and you can rely much more on the experience and expertise of the development company.
This is partly true (at least compared to the level of detail you have to nail down before starting a fixed-price project), but it can be tricky. It is absolutely worth spending enough time at the outset to estimate the inaccuracy risk level in a project (and here’s how we do it at Asper Brothers). If you don’t want the myths of “more expensive” and “unpredictable” to prove true, that is.
Myth 4: It’s harder to control
You have no tools to control your budget and schedule and have no influence over the outcome and the final price.
With any project, you absolutely NEED to know how you’re going to keep track of it. There’s no point in even starting one if you can’t or don’t want to do that – unless you’re prepared to spend much more time and money on it.
The key is to make it very clear from the beginning – both for the client and the development team – who’s in charge of tracking the progress and budget, which needs to happen before the project kicks off.
Myth 5: It’s more work for the client
You need to be more involved in the project development – and you just don’t have the time.
You do have to get involved if you want to have a product that fulfils your requirements – and that’s regardless of the model. This also means you do have control over all stages of the project (in case you believed the myth that the project is out of your hands).
And again, this will ensure you have as little surprises as possible, you can monitor the progress all the way, and are less likely to end up with a product that’s essentially an overpaid disappointment.
When to use which project pricing method?
Essentially, the main comparison of the two models could look something like this:
|Choose fixed price:||Choose time & material:|
When you have a limited, fixed budget.
When you’re flexible about the budget.
When you have a strict schedule, especially if it’s short.
When you’re flexible about how long the project will take.
For a small project with limited requirements.
For a complex, long-term project whose requirements might change.
When you want to leave most of the project management to the software development company (which we don’t recommend).
When you want more involvement in project management – and more control.
When you use traditional project management methodologies like the waterfall model.
When you use agile project management.
So, which is better: time and material or fixed price?
The very general answer could be:
It depends. On both your needs and the software house’s approach to software development.
But the truth is, a lot of software development companies are moving away from fixed-price contracts (except maybe in the case of simple, quick projects that are easy to price and present no major tech challenges) and towards the time and material approach that lets everyone be more flexible and arrive at a better end product.