What are Fixed-price and Time & Material models and are they so completely different?
As a web development company, the main factor that determines our services’ price is the working hours our team spends on a given project. When asked to provide our quote for a fixed-price project, our price is based on our estimation of the time we'll need to create the required functionality, but it'll be also affected by the type of the client we'll work with, the complexity of the project and potential risks, the required specific technical expertise and many other factors. While if we work on a Time & Material basis, the client will pay for the actual hours spent on the project multiplied by the agreed price per person-day. So from our perspective, a contract based on the Time & Material pricing is fairer for both sides.
Someone might argue that contracting a web development company without clarity on a project’s end price is unreasonable and ask for a fixed price offer with a deadline.
This is ok for us, provided that the project also has a fixed scope. The latter means detailed project specifications, user stories, wireframes, sitemaps developed in advance, etc. The compiling of such project documentation is a time-consuming process. Meanwhile, the more complex the project, the greater the probability of omissions in the specifications. And if we agreed on a fixed-price project, we should deal with the consequences of any such omissions.
As it turns out, in this case, we undertake all the risks related to or resulting from the project implementation. It seems unfair.
So, what we do in such cases is drafting an estimate of the working hours needed for the project implementation, based on the documentation provided, and adding a certain percentage on the price to cover any risks of extra time required to develop specific project components. This percentage is usually in the range of 20 - 30%, or sometimes higher. In the end, the cost of the project may be higher than those under a contract based on the Time & Material pricing model. And if we deem that the risk is too high, or we can’t persuade you to pay for the extra hours needed for removing all the project’s uncertainties as a discovery phase, we may decline the project altogether.
What are the main advantages and disadvantages of the fixed-price model? In which cases do you recommend using it?
In our view, the main advantage of this pricing model is that the client is well-aware of the project’s end price and duration from the start. And bear in mind that this model is usually recommended for relatively small projects.
As for the disadvantages, we can point out the following: any changes on the go, initiated after the project has started, are far more complicated because each change request has to be agreed upon additionally and calculated in terms of working hours. In situations like this, there is a potential for conflict of interest. The client wants to get as much as possible for their money, whereas the contractor’s priority is to complete the project within the initial time-frame. And we should note that the outcome of situations like this usually isn’t positive for both parties. All the more so, considering that we mostly work on large scale projects that require up to a year or even more to be fully completed, it's almost impossible for the client to be 100% sure what exactly do they want and how to achieve it beforehand. There's always a chance of unexpected issues or requirements to come up during the development process.
So, yes, clarifying all the project details is not an easy task. Besides, having all specified in advance can be quite limiting and implies that the client has to take all the critical decisions on the project in the very beginning, which isn’t always the best solution.
Some of you are probably used to the Fixed price model and work in the following manner:
- Create Project description, Scope of Work, Project requirements, and all the other documents needed to describe all aspects of the software you need;
- Choose other criteria to assess the offers;
- Send all the items mentioned above as an RFP to several companies that you have selected or have been recommended to you.
Then you assess the offers based on the criteria set and choose the best for you. And you might be wondering how to proceed if you work with the Time & Material model.
Well, it’s not a good idea to immediately select the company with the lowest hourly rate. That said, your choice should never be based on the lowest price offered - regardless of whether we’re talking about the company offering the lowest price or the lowest hourly rate.
As we already discussed in the previous article, one should consider many factors when choosing the right partner for a web dev project. And one of the most significant among them is that the two parties trust each other.
As far as the price is concerned, we can recommend the following approach:
- Research several companies and choose 2-3 of them that you believe could be suitable for your project;
- Ask them for time estimates for the project, making clear that you are aware such an estimate isn’t an actual offer. If the project is large, you can divide it into several smaller projects and ask for an estimate of one of those.
- Compare the estimates, paying particular attention to the differences. For example, try to understand why company A plans a time frame for a specific project component that differs so much from those of company B.
- Pay attention to the questions your potential partners ask - this could give you valuable information about themselves, their approach, and their knowledge of your business.
- Once you have the time estimates and the daily rates offered, you can get an overall idea of your project’s budget and select a partner accordingly.
What are the main advantages of the Time & Material pricing model when compared to the Fixed price one?
- Faster development time - because there is no need for a detailed specification of the project.
- Flexibility - the client can decide on many things on the go, without the limitations of the project specifications, which both parties should closely observe. For example, we’ve seen many clients initially consider certain functionality crucial for a project, and at a later stage, it turns out to be useless and can be omitted completely.
- Fairer remuneration for the contractor - the Time & Material model allows the developer to pay more attention to the quality of their work, which usually results in lower maintenance costs for the client.
- The daily collaboration between the client and the contractor creates perfect conditions for developing the best possible product.
After all, are there any disadvantages to the Time & Material pricing model?
Well, we may consider as such the fact that this model requires a greater commitment on the part of the client - the latter has to participate actively in the development process by testing, proposing, and approving ideas for new features, monitoring the time spent on specific tasks, etc. This means that the client must have the skills to manage and control the development process.
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Here are, in a nutshell, the main characteristics of the two models:
Time & Material model:
- Suitable for complex, long-term projects whose requirements might change
- Flexibility, dynamic work scope
- Requires client involvement
- Budgeting risk
- Suitable for small projects with limited requirements
- Financial risk for the developer
- Less accountability, lack of flexibility
To sum things up, the Fixed-price model is more imperative, while the Time & Material approach focuses on collaboration between the two parties, so the results are usually better.