Time & Material vs Fixed Price Contracts

The budget of a digital product is an important concern for both clients and agencies. Of course, the main factor that affects the price is the scope of work. The cost also depends on the billing model chosen for the project. Most software outsourcing companies use either the Time & Material or Fixed Price billing model.

It's important to determine which billing model would be most suitable for your needs. Let’s discuss the models and compare them to each other.

What is Time & Material Billing?

The Time & Material billing model, often shortened as T&M, calculates the cost of a project based on the hours spent during development. It’s a perfect match for long-term projects that require high flexibility and fast feedback loops.

This model allows adjusting the scope of work, timelines, and budget. Therefore, T&M aligns well with the Agile methodology. It’s difficult to predict every step in the development of digital products, and an iterative approach provides clear milestones and room for manoeuvre. With a combo of T&M and Agile, it's easy to add or remove features based on changes in the market or results of user research.

T&M also helps to get a project started as soon as possible. We can begin working after examining your business needs and desired core features. During development, we evolve requirements based on your vision and our expertise.

In general, T&M helps to achieve a better product-market fit and quicker time-to-market.

Of course, there’re downsides as well. Because of the complexity of development processes, initial estimates of time and budget are bound to change one way or another. T&M also requires making decisions during project development, so you will need to participate in regular meetings and track progress. Even though you will be involved in the project during development, it is still important to choose a reliable vendor. Make sure that the software engineering company knows how to handle communication, prioritize tasks based on your business needs, and deliver the project.

T&M fits best for complex long-term projects that don’t have requirements set in stone. These projects are often in the idea stage or heavily rely on user feedback. In most cases, development support is also billed on an hourly basis.

What is a Fixed Price contract?

A Fixed Price contract is what it says on the tin: a contract with a set price. The scope of work and timeframes are predetermined as well. This billing model is perfect for short-term projects with well-defined specs and a clear idea of the final result.

Unlike T&M projects, Fixed Price contracts require complete project requirements before development begins. These requirements serve as the basis for budget and time estimates. Although the scope of work is established, Fixed Price projects can also benefit from Agile methodologies.

In general, Fixed Price helps to make project results and budget more predictable. If everything goes according to plan, you’ll get deliverables within budget, on a set timeline and per the initial project specifications.

So, let’s discuss what disadvantages this billing model can have. In an ideal scenario, the scope of work, timeframe, and costs don’t change after the Fixed Price contract is signed. This condition makes a project pretty resistant to changes, including positive ones. Because specifications must be drawn up in advance, Fixed Price projects also require more preparation time. If you do need to change something, adding or removing features would require additional paperwork and resources.

Also, it’s difficult to predict the exact number of hours the project will take, so most vendors estimate costs for an expected amount of work and add a margin as a safety net. In some cases, a T&M contract may be cheaper as it charges for actual working hours.

Fixed Price billing fits best for small-scale projects. For example, it’s often a go-to option for MVP development or uncomplicated projects with strict time limits.

What to choose between T&M and Fixed?

It's all about figuring out what works best for your project. The complexity, flexibility, and length of the project are just a few factors to consider. And remember, it's not a one-size-fits-all situation - Fixed Price contracts can be great for long-term projects, and it's possible to use Time & Material billing for short-term development too.

If you’re unsure what billing model works for you, just contact us and get a consultation.