Time & Material or Fixed Price model?

Aug 3, 2022

A good software house offers not only a high-quality project execution but also clear contract price rules for programming work. Nowadays, we will find two of the most popular models in the IT market – Fixed Price and Time & Material.

Time and Material Model

Let’s start with the explanation of pricing contracts for IT projects. ‘Time & Material’ means that a buyer regularly pays for particular work stages. In this way, the client gains control over a project and its budget. This contract, in most cases, is less expensive than ‘Fixed price’ because it doesn’t require preparing extra time for ‘project risk’ (the possibility of appearing incidents that can have an impact on further project stages such as cost, schedule or quality).

To summarise, in this model, it’s necessary to provide regular reports to clients about the next project stages, or the number of hours worked. The advantage here is the flexibility and the possibility to start a project earlier because you don’t spend too much time planning all the actions. Software house works step by step, and a client pays them on an ongoing basis.

Fixed Price Model

‘Fixed Price’ is a model that outlines the whole cost of a project before starting any work. It’s crucial to calculate project risk here, so programmers prepare extra time and add this cost to the price. If you want to choose the Fixed Price model you should pay more attention to project planning from the beginning, which delays the project start date. With more complex projects, clients often decide to attend workshops to help them describe their requirements and visions.

Why such workshops might be a necessity? When the final vision of a project is unclear, or while execution, we are still creating a project, a Fixed Price won’t work for us here.

Fixed Price or Time & Material – for whom?

We propose two examples, that should clear out both price contracts.

A good example of a Fixed Price? Online shop with cardboard games.

A certain client owns a shop with cardboard games. She wants to expand her business by creating an online version of her shop. She doesn’t need IT knowledge (but it won’t hurt if she already has this knowledge), moreover – she doesn’t need to know about e-commerce. She has defined the aim and budget possibilities, and a specialist who conducts her project shares his knowledge about what every online shop should have and proposes ready-made solutions. The client pays for the pre-established outcome and before the project starts to date, she spends more time on planning with programmers – only then they can start the work. Fixed Price is for those who have: a clearly stated aim, budget and schedule.

A good example of Time & Material? An application for arranging meetings (for people who play cardboard games). A certain shop owner (the shop is also available online) with cardboard games wants to arrange meetings for her target audience more easily. She hires a programming team to create an app to help people meet for a game session. She knows her clients and the aim well, but she doesn’t have a specified final vision yet. But she wants to start and then work on her project further. Programmers know that they will be developing this application, adding new functions and focusing on the client’s feedback (and her clients). During the creation process and while using the app, the client informs about her remarks/needs, and the programming team is paid per hour worked. This model means flexibility for a client who not only wants to start a project but also knows that she will be investing in her business development. Such an application or a system works for itself, and the next actions will make sales grow.

Time & Material is for those who… don’t know what the outcome of a project should be like, but they know that they will develop their project further. With the Time and Material model, your work will start earlier and you can monitor the progress on an ongoing basis; it means flexibility in action and step-by-step progress.

How to decide which model to choose – Fixed Price or Time & Material

The above-mentioned examples are only two of many possibilities. Before you agree to one pricing contract you have to consider the features of your project, the type of company, the budget and the industry. The project manager will propose to a client the most suitable solution.