Currently, there are two most popular project billing models available on the IT market:
Fixed price- i.e. settlement with a software company at a price fixed in advance for execution of a part or the whole order
Time & material - i.e. accounting for software house according to the number of hours actually worked and material used
In order for there to be cooperation, both the supplier and the contracting authority must establish an ideal consensus, which will be a good solution for both parties. Usually, the customer is afraid of a time& material contract because since ancient times we have been taught to pay a predetermined price for the work done, so why would the customer pay for the time actually worked? After all, a programmer can enter any number of hours into an hourly report. From the point of view of a software house, the matter is not so obvious - dedicated software is usually not a closed product - it is not a car or a computer, but a system that can change, be updated or developed at any time. During the cooperation, customers often change the initial assumptions and sometimes even the main functionalities of the developed application.
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In today's article, we will show you the pros and cons of any type of settlement, and we will try to advise you in what situations it will be more beneficial to choose a specific model of cooperation.
Fixed Price Contract
Time & material contract
Well, we already know the pros and cons of the proposed solutions, while the client often does not know for himself which approach will be more effective for his project. What is important, each project should be considered individually.
What is time& material actually?
It is a type of contract that is extremely flexible when working with a software house because it allows changes to be implemented during the contract period. It is a type of contract that specifies the amount of payment for the work performed in relation to the duration of the contract and the value of the tools used. The contractor in this model is informed about the progress on an ongoing basis (usually in 2-week iterations) and receives a detailed report on the work performed. Thanks to this, it is able to verify the status of the project and introduce possible changes. An unquestionable advantage of this model is the savings because the customer always pays for the actual work - the project manager, analyst and programmer, with no risk costs added.
In what type of projects will time & material settlement prove to be successful?
The choice of this type of settlement is recommended for customers who have an overall vision of the final product, but it is difficult for them to specify the full scope of work and schedule. In this model of cooperation, the client determines the basic functionalities of the project, while the details of the functionalities are worked out during subsequent iterations of programming work. Time & material is also used in projects for which it is difficult to specify their total size, as well as in those where the client is aware that requirements may change during the project's development cycle - e.g. there are many stakeholders who influence the project.
In which projects will Fixed price work best?
This is an option for all projects whose value can be estimated even before work begins - it must be a well-thought-out project that has a thoroughly prepared specification that takes into account its real-time of execution, exact schedule and scope of work. The client does not have to monitor the project constantly in this model either - it is settled upon presentation of the entire project. Fixed price settlement is best applied to small projects where the risk of non-compliance with the client's expectations is low. In the case of larger projects, it should be remembered that when choosing a fixed price, the preparation of the initial specification may at the beginning be a large entry cost at the start - usage scenarios, functional mock-ups or database structure - these are the components that are necessary to safely determine the entire scope of the project.
Fixed price is more expensive - what does that mean?
Every software house, no matter how transparent the project will be, must include a certain reserve in the costs of the fixed-price contract in case of unforeseen complications that may occur during the project. The total fixed amount will be a little bit higher than the time & material valuation. The difficulty of introducing modifications to a fixed price settled project is that in order to change the scope of work during the term of the contract, it is necessary to modify the specification of requirements, and thus reassess the changes made. It seems, therefore, that fixed price is not a cost-effective model, but such a definition will only be relevant in the case of customers who will choose such a settlement recklessly, without the certainty that they have clearly defined and documented requirements for what the final product should look like.
What to do if the client is not sure which model of cooperation to choose?
A common solution is to use both settlement options to give the customer the opportunity to check the quality of cooperation if he is just starting to cooperate with a software company and then after the MVP stage move on to the Time& Material model. When deciding to cooperate with a software house in order to create dedicated software, it is necessary to analyze the size of the project, its expected shape and the effort required to achieve it. A well-made decision will save the customer from paying for the service received without sacrificing high quality.