Confused about the Fixed Price and Time & Material Engagement model? Let’s know them in detail

After choosing the right outsourcing partner for your next project you need to sign a contract. Yes, contract! It’s time to choose between Fixed Price and Time and Material contract is an important decision you need to make when you start a project. Fixed Price and Time and Materials contracts are the two primary methods that are served by any consultants to their clients. As they offer both to the client, they have to choose among them.

In this blog, we will give you a detailed analysis of fixed-price vs. time and materials, so it would help you to pick the correct option for your software project.

So, let’s buckle up. Here we begin!

What is a Fixed Price Contract?

A fixed-price contract is a type of contract in project management wherein the payment does not depend on the resources or the time spent. It is a single-sum agreement where the software development company completes a project within the agreed sum and the given time limit. It is useful for the limited budget of a firm. It means that you know exactly how much you’re going to spend on the project.

You should be clear about your requirements, features, and business logic before signing the contract. It will fit smaller projects, for example, small tasks, blogging websites, a website design, where you know exactly what you want it to look like.

Benefits of Fixed Price Contract:

No-risk:

All risks are handled by your team. They agreed on the terms of contact, so they are highly motivated to meet the deadline and budget.

Budget-friendly:

Know the costs at the very beginning of your cooperation, which allows your company to better manage the finances, it will fix according to budget only.

Predictability Scenario:

Since the developers know what your vision of the product is, there won’t be fewer surprises after the software is ready to go live. As it gives both buyer and seller a predictable scenario, as everything is fixed before the length of the contract.

Fixed Price contract has flaws also:

Less flexibility:

The negative aspect of this model is that it doesn’t provide a lot of flexibility once the project is underway, as changes would affect the cost of the project, and could create a clash of interests on both sides.

Less accountability:

Less accountability can be a pro or a con depending upon each case scenario. It means that there is not much interaction or to and fro between the customer and the team. Some of the decisions about the project will be taken by the development team on its own accord.

What is a Time and Material contract?

A time and material agreement is completely different from a fixed-price contract as it depends on the number of hours spent on the project instead of the initial estimate. The time and material in which the cost is based on actual time spent on the project and an hourly rate. However, this model offers you much more flexibility when it comes to adjusting your requirements and shifting directions accordingly to your needs. It is recommended for larger projects, for example, a mobile application development, as many unexpected tasks may arise during the development process.

Benefits of Time and Material contract:

Fruitful cost:

As you have paid according to time spent on your project while developing it. Also, to limit the risk of changing requirements, the software house usually charges a premium for the uncertainty. In time and material, there’s no reason for this overhead. You pay for the actual completed work only.

Flexible:

It has a high level of flexibility. You can change and add features during the development process, which helps companies with an unclear vision of their product.

Transparency:

You know exactly where you’re at with the project and have an actual impact on the result so team make sure to give you updates on the progress of your project. It will help you to estimate right away whether the software will meet your needs or not.

Time and Material has flaws also:

Budget control:

Since modifications in the project cause delays, as you know the approximate project implementation costs there might be a risk of exceeding the expected budget.

Administrative expenses:

Time accounting, reporting, and other similar things – all of these formalities require a lot of time. Hereby, I present a table that will easily compare both the contract types. It will help you to quickly determine the project phase and the mode to go with the best option!

Hereby, we present our conclusion in a table, so you easily compare both the contract types. We hope that it will help you in choosing the best option!

 

Project Features	Fixed Price Model	Time and Material Model
Size of project	More suitable for small to medium projects.	More suitable medium to large.
Project type	Best for small, MVP, short term projects.	Best for large, long term projects.
Flexibility	Hard to adopt unexpected changes in the projects.	Easy to adopt unexpected changes in the projects.
Control	Its control over the project is little.	Its control over the project is significant.
Requirements	Its requirements are predefined before starting the projects.	Its requirements change according to the flow of the project.
Complexity	It is good for less complex projects.	It is good for simple and complex projects.
Payments	You have to pay in advance before starting the project.	You can pay according to the project.
Project model	Fixed cost.	Actual man-hours and material.
Deadline	Its deadline is fixed.	Its deadline is vague.
Budget	Before signing the contract, the budget is predefined for the project.	The budget is flexible as it charges according to hours spent on a project.
Final product	Prior you are very clear about the product.	Initially, it is unclear about the product.

Conclusion:

Both the fixed price and the time and material model has its own pros and cons and specific situations where it can be used. Before starting to develop your project 100% make sure about which could be a good option for your project. We hope that it will help you in choosing the best option! If you are still confused about which one you should go with then just: Drop a message here, we’ll show you the way and provide a free consultation.