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The question of price is one of the key components in business relationships. In some cases, this component is the most contested and problematic part of cooperation.
We prepared this information about Fixed Price vs Time and Material contracts to keep our readers informed about the potential issues connected to pricing. Here, we will thoroughly describe the reasoning behind both types of contracts and highlight the pros and cons of Time and Materials vs Fixed Price agreements. We will also try to provide answers to questions of which type of cost calculation is better for a particular project and what is the fundamental difference between a Fixed Price and Time and Materials contracts.
Fixed Price vs Time and Materials types of contracts are two primary types of project pricing in the business. Each of two has own pros and cons, as well as special requirements and particular cases, where they are most beneficial. But as the experience shows, it is a rather difficult task to pick the one that caters to the customer needs.
The Fixed-price agreement is a sort of contract that installs the fixed price for the products and services. It depends on the project's scale, features and requirements presented by the customer. Fixed Price costs can be divided into several payments. Typically, the customer pays a down payment, a defined number of payments during each stage of the process and a final payment.
This type of contracts creates perfect conditions for setting the hard budget for a project in advance. Discussing it once, both parties have to agree on being satisfied with the conditions and do not return to this question repeatedly.
Fixed Price contracts are usually employed for the development of small projects. There are three main conditions for Fixed Price agreement to take place:
The requirements are clear;
The specifications and features of the project are set beforehand;
The timelines are strict.
If one of these points is absent the need for switching to the Time and Materials model appears.
However, this is not a universal solution. The parties often find it difficult or nearly impossible to include all of the possible issues in the contract. This may lead to the undesirable results. For example, the development team may be asked to do many hours of the additional work without any compensation. On the other hand, clients often feel like they have overpaid for the project.
When it comes to the implementation of the idea, it is quite rare for a customer to have the clear understanding of what they actually want. So Time and Materials pricing fits thousands of projects. Unlike Fixed Price, it is flexible. In a nutshell, a client pays for the hours of work spent by the specialists on the projects. No matter how long the project lasts, every hour of it is required to be paid.
The opportunity to easily change the project on the go is the main advantage of Time and Materials model. This type of agreement allows the customer to be completely sure that the project will definitely satisfy their needs even if they would change during the process. Additionally, by implementing the step-by-step changes, the opportunity to achieve the better results appears.
Along with that, Time and Material agreement is not as positive as it seems to be at first sight. The development team may come to a halt when the customer’s budget is exceeded. This may lead to conflicts and troubles.
We believe that the brief introduction to these two models of pricing would not be enough to decide a right model. Every project is a unique concept. Thus, next we will provide the T&M vs Fixed Price model comparison.
The clear understanding of differences would serve the basis of the choice.
Fixed Price Contract Advantages:
The client is aware of the expenses before the project starts. This is extremely useful and convenient for small businesses with limited finances.
Development team knows for sure how much time the project development requires. Similarly, the customer may expect the launch on the defined date and thus plan the marketing measures.
On the other hand, Fixed Price is not the “one-fits-all” solution. And it has some pitfalls.
Fixed Price Contract Disadvantages:
The Fixed Price agreement eliminates any possibility to change the project, add some features or enhance the functionality.
In most cases, signing a Fixed Price agreement leads to the decline in communication between the parties. In turn, this may cause the issues on a project and result in the dissatisfaction and complaints.
Let us take a look at the more detailed Time and Materials model overview.
Time and Materials Contract Advantages:
As we mentioned above, Time and Materials model is flexible and thus unbelievably convenient. The clients feel free to make changes and improve the solution.
This point is profitable for the service provides. No matter what is a duration of the project, the work is paid.
Time and Materials Contract Disadvantages:
It is a common case when a customer asks to reduce the hourly rate. By setting the price below the market average, the development team may lose the considerable amount of money.
The temptation to overrun the estimated timeframes may be too high for the service providers. So in fact, the client may have to pay for the work that should already be finished.
The risks are present in every business process. But the trustable cooperation between the reliable partners minimize the potential issues.
The differences between Time and Material and Fixed Price contracts can hint to the real usage cases for each of them.
Fixed Price model would be the most beneficial in following cases:
Time and Materials agreement would be your right decision in following situations:
If the accurate estimation of the project is impossible, so the flexibility is crucial;
If you have a willingness to take part in a process directly;
If it is hard to plan the process beforehand completely;
If there is unconditional trust between the parties and the process is transparent, so both the service provider and the customer feel confident and safe.
Time and Material vs Fixed Price agreements comparison attracts the attention of theoretical and practical economists all over the world. The right choice of the model is considered to be a source of potential profit. Fixed Price comparison with Time and Material talks for itself: in the first case, you have the fixed amount of money to spend. In the second one, you pay for the time and material (or the developer’s skills) spent on your idea implementation.
The difference between those two approaches looks like a difference between Swift and Python programming languages: the software extension can be implemented using both of these tools but only one of them will be profitable in the specific case.
So make your choice carefully, follow the trends, analyze your requirements to the contract’s specifics and leave your competitors behind!