Project management

Time & Material vs Fixed Price Contracts

Differences between billing models used for software development projects

The budget of a digital product is a crucial issue for both clients and agencies. Of course, the main factor affecting the price is the scope of work. However, the cost also depends on the billing model picked for a project. Most software outsourcing companies use Time & Material and Fixed Price.

It’s important to know what billing model might work best in your case. Let’s discuss the models and compare them to each other.

Time & Material

What is Time & Material Billing?

The Time & Material billing model, often shortened as T&M, calculates the cost of a project based on hours spent during its development. It’s a perfect match for long-term projects that require high flexibility and fast feedback loops.

This model allows adjusting the scope of work, timelines, and budget. Because of that, T&M aligns well with the Agile methodology. It’s hard to predict every step while creating digital products, and an iterative approach provides clear milestones and room for manoeuvre. With a combo of T&M and Agile, you can easily add or remove features, taking changes in the market or results of user research into account.

Also, this type of contract helps to kick off a project as soon as possible. We can start working right after the examination of your business needs and desired core features. During development, we evolve requirements based on your vision and our expertise.

Overall, T&M helps to achieve a better product-market fit and quicker time-to-market.

Of course, there’re downsides as well. Due to the complexity of development processes, any initial estimates of time and budget are bound to change one way or another. Also, T&M requires making decisions during project development, so you’ll need to participate in regular meetings and track progress. And even though you’ll be engaged in the project during its development, it’s still important to pick a reliable vendor. Make sure that a software engineering company knows how to handle communication, prioritise tasks based on your business needs, and ship the project.

Pros

  • Start your project faster

    You don’t have to write down project specifications first — just tell us your idea.

  • Change the scope of work on the go

    With T&M, you can easily use a data-driven approach to shape your digital product.

  • Pay for actual hours spent on your project

    We’ll provide invoices for every milestone.

  • Track everything that happens in the project

    We’ll have weekly meetings, send you reports, and update a Kanban board to make every step of development transparent.

Cons and how we mitigate them

  • Unfixed budget and timeline

    We provide an approximate estimate of time and budget. Then we have you covered: if a reason for schedule changes appears, we’ll warn you beforehand.

  • more input from a client during development

    We’ll help you decide what part of your project is the most important and write down specifications during the development process.

T&M fits best for complex long-term projects that don’t have requirements set in stone. In most cases, these projects are still in the idea stage or heavily rely on user feedback. Commonly, project development support is billed hourly as well.

Fixed Price

What is a Fixed Price contract?

A Fixed Price contract is what it says on the tin: a contract with a set price. The scope of work and timeframes are predetermined as well. This billing model works great for short-term projects with well-defined specifications and a clear vision of final results.

Different from T&M projects, Fixed Price contracts require full-fledged project requirements before development starts. They serve as a basis for budget and time estimates. Despite an established scope of works, Fixed Price projects also benefit from Agile methodologies.

In general, Fixed Price helps to make project results and budget more predictable. If everything goes smoothly, you’ll get deliverables within budget, on a set timeline and per the initial project specifications.

So, let’s discuss what disadvantages this billing model can have. In an ideal scenario, the scope of work, timeframe, and costs don’t change after the Fixed Price contract is signed. This condition makes a project pretty resistant to changes, including positive ones. As specifications have to be drawn up in advance, Fixed Price projects also require more preparation time. If you do need to change something, adding or removing features would call for additional paperwork and resources.

Also, it’s difficult to predict the exact number of hours the project will take, so most vendors estimate costs for an expected amount of work and add extra margin as a safety net. In some cases, a T&M contract can end up being cheaper due to charging for actual working hours.

Pros

  • The project scope is loud and clear

    You know every next step of a vendor and what result is expected.

  • Costs are final

    Unless you want to change the initial scope of work. There’re fewer risks to spend more than your initial budget.

  • Project delivery has a predictable timeframe

    You can easily plan other activities, such as your marketing strategy, around a deadline.

  • less need for client's input during development

    As specifications for Fixed Price projects are usually exhaustive, meetings are mostly needed to demonstrate progress.

Cons and how we mitigate them

  • Lack of flexibility

    We make sure that all core features are included in the initial scope of work. Our team develops digital products with upscaling in mind.

  • Slower project start

    Our Project Success Unit helps to get you through the project planning stage and outline essential project documentation as fast as possible.

Fixed Price billing fits best for small-scale projects. For example, it’s often a go-to option for MVP development or uncomplicated projects with strict time limits.

What to choose between T&M and Fixed?

The choice depends on many factors: complexity, preferred flexibility, length of your project, and so on. Besides, it’s definitely not a must to follow our recommendations in ten out of ten cases. Fixed Price contracts might perfectly work for long-term projects. And we developed many MVPs using Time & Material billing.

If you’re still not sure what billing model works for you, just contact us and get a consultation.

Blog author photo
Diana Sadykova

Head of Marketing at Quality Wolves