Time and Materials (TM) Contract vs Fixed Price (FP). Which One Is Better? - XB Software

Time and Materials (TM) Contract vs Fixed Price (FP). Which One Is Better?

| |Reading time: 4 minutes

For the organization to have the opportunity to exist in the future, it is necessary to recognize the business prospects. Only after determining the possibilities of the business, as well as the directions and methods of its evolution, one can talk about specific strategies for growth and competition. To be able not only to assess the prospects of business correctly but also its ability to reach these goals, it is necessary to ensure or initially lay the maximum transparency and manageability. As a result, it will lead to real justification of decision-making. In the digital age, this is not a big deal.

After realizing the specific goal and objectives of the business, the client comes to XB Software for project outsourcing development. What contract models to choose depends on the task that we want to solve together. Still, as to sort out all IT outsourcing pricing models can be rather tricky, we will analyze the most widely used.

Time and Material vs Fixed Price Principles

Fixed price contract vs time and material difference for a client lies between the categories.

Fixed Price

  • Project Scope is clearly defined. The number of working hours that are required for development are estimated, including risks.
  • The development budget can’t be exceeded. A client has got a particular goal, and one comes for the custom-made solution. The sum is fixed.

Тime and Materials

  • High level of uncertainty in a project.
  • There’s an idea of a product/solution or/and a business goal. The path to the embodiment is divided into major challenges which are split into smaller tasks. We move forward to that objective stage by stage perform tasks one by one. On the go, it’s possible to correct the development process in case the customer’s requirements change depending on the market, new coming challenges, and other factors.

What contract model is better to choose for the achievement of your particular target, it will become apparent after analysis of a few examples below.

For a startup with an absolutely innovative idea, it’s better to sign a fixed price contract and develop a minimum viable product (MVP) to test it. It will have minimum features, but sufficient to satisfy the first consumers. The main task is to obtain feedback for the formation of hypotheses for further development. To understand how projects are estimated, you may read additionally “How to estimate the cost of fixed-price projects.” If the idea is viable and in demand, then further development is better to do according to time and materials contract taking into account incoming customer requests, requirements, etc.

For a startup that wants to develop a product like the existing ones but with the improvements, it’s better to sign a TM. Your direct competitors already have got a stronger position in the market and may react dramatically fast to change their products to outcompete you. The possibility to alter quickly and adapt to market trends, fix bugs and add features is a substantial advantage TM gives.

If you need automation of some particular process that stably works and doesn’t change over a long time,  then this is an FP project.

If you have automated many tasks separately from each other, and you have come to the need to combine everything into one system,  the practice shows TM is better. As while implementing new ideas of optimization/analytics/redistribution of information flows/simplification of processes, hidden issues may emerge. It will be cheaper for a customer to pay for their solvation as they occur than to pay for risks or estimated cost of bugs by fixed-price contract that may not even happen.

Where is the misleading

There’s a customer’s common misleading in the reason of why they are unhappy with a TM project.  They blame time and materials contract for software development if they have spent money but didn’t achieve the result. Nevertheless, the reason is not on the surface. An experienced team will lead you to your goal at a set time with any form of contract. Practicing a partnership approach vendor will honestly tell you below which budget it’s better not to start your project with any contract type. You can also try a free estimation template to feel more confident at the negotiations.

 

FREE-Estimation-Template-+-PERT

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Yana Sarycheva

Yana Sarycheva

Variety is the way of evolution - personal and professional. I never stop trying something new, testing and analyzing the result of my work.