Difference between fixed price and time & material contracts

Piotr Groza Piotr Groza • Sep 07
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When it comes to payment plans for IT projects, there are two prevalent methods. How do they differ and is the correct choice always obvious? Discover the difference between Fixed Price and Time & Material.

How to price a project?

With first method – Fixed Price – you determine a set price for your project in advance. The budget, scope of the job and work schedule are already known during negotiation. For the client, this has the benefit of relieving them of almost all the responsibilities related to project completion. The second, more flexible but also more demanding method is Time & Material. Below, we describe the main pros and cons of both payment plans.

Software Engineers - development team

Fixed price

With Fixed Price, the price remains the same no matter how much time and effort the project consumes. For both parties, this can mean value as well as problems. The client will be content if they do not need to pay additional costs, e.g. for exceeding the estimated working hours. The software house, on the other hand, will get paid even if completion is unexpectedly quick and smooth. At this point, you may be wondering whether this payment plan will lead to conflicts of interest. The developer may be tempted to use the cheapest working methods available while the client may put pressure on the developer to make the most out of the budget. All of this means that before entering into cooperation it is crucial to perform detailed research and seek reliable opinions on the other party.

The advantage of Fixed Price is that the result is known at the very start of the project. Because setting a fixed price requires knowledge of the most minute details, you need to define the complete scope of the job and work schedule at the planning stage. On one hand, this guarantees that expectations are met. But on the other hand, is it possible to define 100% of the concepts of a project before it even starts? Our experience tells us that this is very rarely the case. Knowing the result before starting the job comes with a steep price. In the case of Fixed Price contracts, this price is an almost complete lack of ability to make modifications during the project. Furthermore, such detailed initial arrangements take a lot of time, postponing project commencement.

The final aspect of the Fixed Price model is the price itself. Or more precisely: its ratio to the amount of work required. With FP, the price is usually much higher than that of a comparable project carried out in the T&M model. Where does this big difference between Fixed Price and Time & Material come from? The reason for this is that developers will increase the predicted amount by a safety margin in case of unexpected additional work. And you can’t blame or judge them for such decisions. After all, nobody likes losing money.

In short, the pros of Fixed Price are:

  • Easily managed budget
  • Result known at the start of the project

Unfortunately, the Fixed Price model also comes with numerous drawbacks:

  • Lack of flexibility
  • The need to precisely determine the full scope of the project and the work schedule right at the start
  • Higher price…
  • …and later commencement when compared to the Time & Material model
  • Conflict of interests
  • Difficulties when combining with Agile methods of work

In our opinion, the disadvantages of FP outweigh the advantages in most cases. Let’s take a look at the alternative. Is it the preferred solution?

Time & Material

The Time & Material payment plan offers significantly more possibilities. What’s the difference between Fixed Price and Time & Material?

First of all, paying for the actual job performed is a lot more economical. With the T&M method, as work progresses, the developer provides the client with reports and analyses to show how they are doing. This allows for continuous control over the budget.

Secondly, Time & Material offers flexibility. It’s difficult to determine the exact scope of a project right at the start. But with this method, it’s no problem at all. Modifications to a project can be introduced at any time. This ensures that results will be fully aligned with actual needs. With FP projects, all additional functions are priced separately. In the case of T&M, the client only pays for the functions they need right here and now – functions which may have been different when the contract was signed. It is often the case that while a project is in progress, the business model or the client’s expectations change, new ideas emerge and priorities switch. Building an IT project is not about going step by step according to a predetermined plan. This is why Time & Material works a lot better than FP in the case of the Agile method. In other words, a combination of the agile methodology with a flexible budget allows for adapting the product to current needs.

Thirdly, with Time & Material work is much more efficient. Project commencement itself is far simpler because it requires less planning. To start working, it’s enough to define just the basic functions of the project. With every consecutive stage of creation, the concepts and specifications can be refined. Work dynamics are also greatly influenced by effective communication with the client. By discussing reports on a regular basis, the developer can better address any new needs. Consecutive iterations are short and the conclusions are utilised in further stages of the project.

To sum up, the main advantages of Time & Material are:

  • Flexibility
  • Dynamic work
  • Payment only for completed work
  • Constant communication
  • Excellent alignment with the Agile method

As everything else in this world, Time & Material also has its drawbacks:

  • The project requires more attention from the commissioning party throughout its entire course
  • The final price is known only after completion of the project

The bigger the IT project, the bigger the budget and responsibility. This is why selecting the proper software house is one of the key elements in preparing the entire process. At Idego, we strive for transparency and clear rules, which is why we opt for the Time & Material payment plan. As you have already learned, this allows us to remain open to the changing expectations of our clients at each stage of the project. We are flexible and always work to give our clients exactly what they need. If you’re still wondering whether Time & Material is the best solution for your project – drop us a line. We’ll gladly answer all of your questions.

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