Time and Materials vs Fixed Fee – Which Fits You? (Guide)

Those two contracts are entirely different. Find out which one will be a better fit for a software development project and check if there are any exceptions.

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TL;DR

Introduction

Which one to choose: time and materials or fixed fee?

We make this choice easy for you by presenting 5 benefits of not deciding the whole scope of work upfront – and explain why it’s a better solution.

Read on.

Time and materials vs fixed fee

Does the fixed-price model seem less risky because you know the total cost of a project before its development?

Actually, it just seems that way and it does not really benefit the investor. In a fixed-price model, all business and product decisions, as well as the scope of work, must be decided, declared and contracted before the project starts –so in the time when you know the least about your project.

We advocatethe time & materials model in which the cost is based on actual time spent on a project and an hourly rate or man-day rate.

Here are the benefits of NOT deciding everything upfront:

#1 Final product is better because you’re flexible

In the time & materials model, you are able to adjust the project’s requirements and shape to constantly changing business circumstances. This way, there’s no need to renegotiate the contract or conduct painful discussions with the software house to determine whether a feature was or was not in the scope of work.

In the T&M approach, the scope can be adjusted ad hoc. For example:

  • Do you need some additional functionality? No problem. Let’s do it.
  • Want to simplify the registration process? Let’s skip the unnecessary features.
  • Need to slightly pivot your startup? Go ahead. We’ll support you.

Choosing the right technology also helps.

#2 Final product is better because you prioritize

Unlike the fixed-price model, when an investor pays for every hour of work he or she analyzes the most features in terms of ROI (Return On Investment). We see it all the time and it’s good! This mechanism helps to build things that are really important for the product. Sometimes these things are not the same as those contracted at the beginning of the project.

Also, our priorities are aligned. The development team wants to deliver the highest quality product. While in the fixed-price model, the software house naturally tends to maximize its margin thus producing the project at the least possible cost.

Choosing the right scope of work is critical in this area. For more information, check out what is a real MVP.

#3 The time & material model is faster

A highly detailed analysis gives you a definition of the scope of work before the project starts. These things take time, yet practice shows that nailing all the features is almost impossible. The time & material model allows you to start fast and move at an accelerated pace while working on details along the way.

Also, contracting the fixed-price model takes longer than signing simple time & material deals. That means there’s less time spent on negotiating the paperwork and renegotiating the scope.

#4 You save money

It’s not only that but with the time & material model, you only pay for actual work completed while saving time on the project.

Also, to limit the risk of changing requirements, the software house usually charges a premium for the uncertainty (the less information, the higher the premium). In time and material, there’s no reason for this overhead.

#5 Time & material limits risk

You don’t know the final cost of your project, but unlike the fixed-price model, you are not committed to the business relationship with a software house until the end of the contract.

On top of that, the time & material model requires significant transparency from the software house. This allows you to track progress and know exactly where the team is at any point.

Finally, ending up with a better product reduces the business risk of your enterprise.

Time and materials vs fixed fee – How to decide?

There are a three simple questions that will help you to decide:

  1. Do you know exactly (and I mean EXACTLY) what you would like to build?
    If no, go with T&M. If yes, you can negotiate the fixed-price, but remember its downsides.
  2. How much is managing the financial risk important for you?
    If it’s crucial, pay the extra money and go with the fixed price. If not, go with T&M and control exactly what you are developing.
  3. How important is flexibility to you?
    If important, go with T&M. You’ll be able to prioritize and adjust your project scope every 1-2 weeks. If not important, go with the fixed-price model and wait for end results from your contractor.

NOTE:
We do NOT think that defining the cost of a project upfront, especially for a startup, is a very good idea. To make cooperation really comfortable and the project less risky, we strongly recommend the time & material model. It ensures we deliver a really great market-fit product that you’ll love!

Leszek Knoll
github
CEO & Co-founder
Bianka Pluszczewska
github
Editor

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