Fixed price vs. time&material

fixed price vs

time&materials

https://dotinum.com/

W W W . D O T I N U M . C O M

Harry was always a very frugal

person - both in a private life and

at work.

I'm looking for a

remote software house

in order to build my

website.



You can guess, that his main aim was to

save money as much as possible.





As his startup was just fledgling, he wasn’t

sure how the website should be created.

However, there was one thing he wanted

to know immediately - the price!




In the face of so many uncertainties, web

development company couldn’t estimate

the whole project at this stage. This is why

they offered the best possible solution for

both of them - time&materials model.



Harry felt really nervous - he has never heard

about this term before.

He can’t approve of something like this. He

must know the price!

Or they establish fixed prices or there will be

no cooperation!




Poor web development company had no

choice - they had to overstate the price, just in

case of unexpected market changes.




So in the end, many unexpected changes

weren’t included in the agreement so the

project has been finished and there were still

many features to add!




Well, not only has Harry not saved

money, but he also had to spend at

least twice more in the end!

If only he had chosen time&materials..




I guess you don’t want to make the same

mistake as Harry?

Is so, familiarize yourself with the

“time&materials” and “fixed prices” terms and

choose the approach wisely, on the basis of

your actual needs!





FIXED PRICE D E F I N I T I O N

Fixed price (or a lump sum contract) is an

arrangement, which contains clear requirements

that will not change. The precise budget for the

project and deadlines are established from the

beginning. This model of pricing methods works

very well, when the scope of the project is small

and outcomes are highly predictable.




BENEFITS AND DISADVANTAGES O F A F I X E D P R I C E A G R E E M E N T



P R O S

Transparency. As all requirements, deadlines and costs

are set down in advance, the client has a sense of the

security - everything is determined in the arrangement.

Predictability. The company can plan the budget for all

the ongoing projects upfront. They are certain that there

will be no additional outlays.

Small involvement. Initial negotiations could take some

time.Then, everything is included in the contract -

responsibilities, tasks and the general cooperation

expectations. In this way the client doesn’t have to spend

additional time on controlling the provider’s performance

on the particular stages of the project. He just waits for

the final effect.




C O N S

No flexibility. If the need arises to make any changes, it

could be rather difficult to put into practice. Both sides

have to strictly stick to the contract. It is a big limitation,

especially for the customer, that doesn’t have a chance

to add any new feature during the course of the project.

Variability of the final cost. The price of the project is

only estimated in the beginning. However, it can’t

change, after achieving the ultimate result. It happens,

that the final cost of the work is different than it was

assumed. For instance, it can be smaller and the client

will lose some of his money in this way. Nevertheless, the

die was cast. It’s a customer’s risk while deciding on a

fixed price model.




C O N S

Little control of the project. After determining your

expectations in the beginning, then you will be

usually waiting for the final result. It means, you

won’t be able to follow and control every progress

made in your project, because everything must be

established in the agreement.

Lower quality. The software provider is limited by

the price established upfront while choosing

materials. It could influence your project negatively -

outsourcing company may mainly focus on not

exceeding the budget and maximizing their margin.

As a result, they could decide on using a lower-grade

materials, just not to overrun the fixed price.





TIME&MATERIALS D E F I N I T I O N

Time&materials is much different than fixed price model,

because in this case you pay exactly for what has been

done. It means, the software provider bills you on the base

of hourly rates of labor and costs of materials. This type of

pricing model works, when you are not sure about the

shape of the final outcome you want to achieve and the

scope of the project is big.




BENEFITS AND DISADVANTAGES O F A T I M E & M A T E R I A L A G R E E M E N T



P R O S

Flexibility. In this case, you are able to change, add

or remove any feature you want, no matter what

kind of stage the project is. Project’s requirements

won’t be a limitation - you can always adjust them to

the changing business circumstances. So you won’t

waste your time on renegotiation the agreement, as

it is in the case of fixed price.

A lot of control. You can take an active part in the

process of creating your vision. It means, you have a

real influence on the final outcome. With your

contribution to the project, it will be much more

easier to achieve the goal you desire. You and

developers become a team members that are

working together towards the same aim.




P R O S

Time saving. It’s much faster to sign a time&material

contract. You don’t waste time on bidding the offer or

determining requirements in a rush. Web development

company is ready to kick off a new project as soon as

possible. All details will be adjusted to your expectations

during the course of the project.

Money saving. By choosing fixed prices, software house

charges you more for the uncertainty - they only guess

how much the cost of product would be. With a

time&material agreement you will pay for the actual

results, not for the price assessment.




P R O S

Agile methodology. Using this method will

influence on the final outcome - the quality of

your project will be much higher. How does it

work? Software provider builds the plan of your

project and then divides the process of

development on a few stages, called “sprints”.

At the end of every phase, everything is tested

and consulted with a client’s representative. It is

a perfect moment for his feedback concerning

possible changes and improvements.




C O N S

Less budget control. Your company has usually

a determined budget for particular projects. By

choosing time&materials, you have to be aware

that sometimes costs can increase more than

expected, if the scope of the project changed

significantly. For example it can turn out that you

needed many more features than you assumed in

the beginning. In this case the cost of the final

result will be higher. However, you will achieve

the product you are satisfied with.


C O N S

Deep engagement. On the one hand, the

possibility of having a big impact on the final

outcome is a relevant advantage. On the other

hand, controlling every stage of the project

requires a lot of time. It means, there should be

someone responsible for this activity in the

company, what can become troublesome in the

long term.





AND THE WINNER IS.. There is no winner here.

Choosing an appropriate pricing

model depends on many factors,

like the scope of the project,

your company’s goals or the

budget.



Dotinum is a software house and

creative agency from Poland,

established in 2002.

N E E D A H E L P W I T H B U I L D I N G T H E

W E B S I T E O R M O B I L E A P P L I C A T I O N ?


CONTACT US:

[email protected]




Fixed price vs. time&material

Small Business & Entrepreneurship

Transcript of Fixed price vs. time&material