Short story about a fixed price
Harry was always a very frugal person – both in a private life and at work. He has just established a start-up and was looking for a remote software development team in order to build the website. You can guess, that his main aim was to save money as much as possible.
He wanted to make the best decision – therefore he started talks with a one company from Eastern Europe, because they were said to have reasonable prices and good quality.
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. Are they going to cheat on him or what?! He asked them suspiciously what it means. They explained how it works and Harry clutched his head in astonishment. He can’t approve of something like this. He must know the price! No matter what. 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. Nevertheless, Harry agreed, because he felt so safe with a fact that he knows the price.
This story doesn’t have a happy 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 definition
This term is something we are used to know in our lives. We meet fixed prices almost everywhere – at restaurants, grocery or clothing shops. However, there is one, main reason why this system works there – suppliers know the exact cost of their products before selling them. Software development companies, in many cases, don’t know that before the project starts.
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.
Why is it so important? Because otherwise, a software provider, with so many unknowns will have to overestimate the price. This approach is very risky for him. If he doesn’t know how much time and effort the project takes, he has to protect himself from the possible financial loss.
This model of pricing methods works very well, when the scope of the project is small and outcomes are highly predictable.
Benefits and disadvantages of a fixed price agreement
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.
The company can plan the budget for all the ongoing projects upfront. They are certain that there will be no additional outlays, that could possibly surprise their company in the future, after the project is completed.
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.
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.
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.
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.
This method is very popular when it comes to cooperating with a software house.
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.
Moreover, you will receive a precise reports containing specific information regarding progresses of the work. You also get the access to all data and the transparency of costs.
You don’t waste your time on conducting long debates regarding conditions of the cooperation. In exchange of this, the outsourcing team starts working on your project immediately.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. If your aim is to create a product together with a software provider, which is exactly tailored to your needs, time&material is a good choice.
Benefits and disadvantages of a time&material agreement
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.
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.
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.
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.
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.
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.
However, bear in mind that the software development industry is very innovative and therefore variable. This is why establishing a fixed price could be a challenge. Therefore time&materials seems like a more flexible and realistic model.
The choice is yours. Good luck!
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Take a look at our presentation about fixed price vs. time&materials👇
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Dotinum is a software house and creative agency from Poland, established in 2002. We specialize in web, mobile and e-commerce development.