Time and Materials vs Fixed Price – Which One Is Better?
1 July 2020
I’ve seen a lot of different articles and comparation tables on the Internet trying to clarify the differences between Time and Materials (T&M) and Fixed Price cooperation model but I’ve decided to write this blog post to explain it from Evertop’s perspective because of our extensive experience.
We are a little bit untypical software development company. We are not focused only on Time and Materials projects. We really do a lot of fixed price too. This means that we know how to do them and how to estimate the work effort, which is very important in such projects.
Another reason is that I’ve had recently a few conversations with our potential new clients where this subject was intensively discussed. Maybe it would be better to write it down in some structured form and next time just send a link to this page 😉.
The question is obvious – “Which one is better?” and the answer is obvious too – “It depends.” The aim of this article is to clarify what it depends on.
Comparation of Time and Materials (T&M) and Fixed Price
Ok, so most important things first. Let’s start with definitions:
Time and Materials (T&M) is a type of contract where the client agrees to pay the contractor the amount of money based upon the time spent to perform the work, and for materials – the time used to complete it, no matter how much work is required to do it.
In software development business client orders a single developer or a team and then an hourly or daily rate is agreed and it is billed once a month. Client doesn’t know the total cost and time needed to complete the work. He only knows more or less how much it would cost monthly.
Fixed Price is a type of contract where the payment amount does not depend on resources used or time expended. Price and usually a deadline is agreed at the very beginning and written down in the contract.
If you ask anybody at this point, which one is better he will answer for sure – Fixed Price! And he would be right. It is for sure better to know when You’ll receive work done that You’ve ordered and how much it would cost. And here starts the problems…
Let’s think for a while, what the client needs to provide the contractor with before they can start the cooperation. Usually for both sides of contract, most important are scope, deadlines and budget. How it looks like when you want to start:
|Scope||Client needs to provide complete scope of the project||Just a frame scope or an idea is needed|
|Deadlines||Client can require deadline or it can be agreed by both sides||No deadlines can be agreed|
|Budget||Contractor will provide the total cost of the project||Very rough estimations can be made by the contractor|
So as you can see, even if Fixed Price is better it is not easier to achieve. Client needs to have extremely well defined requirements of what he wants. The best situation is if they are described in one of generally accepted convention or standard, like UML or BPMN. Only this allows contractor to estimate the work effort and to provide fixed price and deadlines.
Let’s have a look now at what the advantages of both kind of cooperation methods are:
Advantages of Time and Materials mode:
- Flexibility – if client pays for a team and he changes his mind all the time, it might be frustrating but contractor would usually accept it. This generates more work but if every hour is paid – everything is fine.
- Quick start – it’s really quick to start this kind of cooperation. No sophisticated description of work is needed – just a team with required skills. Usually requirements are being defined continuously during the cooperation and provided to the team. If a client has only a general idea, and he wants to start very fast, and create something simple like Proof of Concept this method of cooperation would be perfect.
- Team management – client usually manages hired team by himself. He tells developers what to do and what not to do. Of course he can ask for advices or transfer team management to contractor but it’s his independent decision.
- Easy contract termination – it’s quick to start but it’s also easy to terminate the contract. If something goes wrong or client has lost his budget or he has just changed his mind, he can terminate the project and the notice period is usually 1 month.
Advantages of Fixed Price mode:
- Fixed price – as simple as that. I think this point doesn’t need any additional comment. It’s really great to know all cost before you start anything.
- Fixed deadlines – exactly the same like above. If you invest some money, usually pretty much, its good to have guaranteed deadline when the job will be done.
Looks really good so far but as you know, there must be some disadvantages also. Let’s take a closer look:
Disadvantages of Time and Materials mode:
- Unknown price – it’s hard to estimate the work effort hence the price if the scope is not defined, user requirements changes and client wants the contractor to be very flexible. Usually both sides try to define at least some frame estimation but also both of them need to stick to them really hard and not to exceed them.
- Unknown deadlines – as above… to be able to accept any deadlines contractor needs to know the scope and it can not be changed during the project. It is very rear situation in T&M.
Disadvantages of Fixed Price mode:
- Lack of flexibility – Contractor, who takes all risks on his side, has no interest in any changes of contract statements or in work description. All such changes generate more risks for him; the work would take more time and the cost will be higher. However, the price for the end client is fixed so the contractor will get loss on this project. Any extra work needs to be estimated and can be done only if the price will change too.
- More time to start needed – in this type of cooperation all details that affect price need to be perfectly well described and cannot be changed during the project. It usually takes time. A lot of time.
- Lack of influence on team management – contractor prefers to manage his team on his own to control costs better. He may want to perform some part of work with a lower qualified people to keep costs lower. And unless it affects quality in some noticeable way it’s acceptable but sometimes it goes too far and may cause problems.
- Contract termination being problematic – it’s hard to terminate the contract for both sides. Fixed price contracts usually has defined contractual penalties for terminating it. It is because when you want to stop the project in the middle it affects either the contractor (he has lost job for his team) or the client (he has lost the contractor and finding new on takes a lot of time).
As you have probably noticed I’ve shown those aspects of both types of cooperation in the way showing opposites. Advantages in one model are disadvantages in the second one. I’ve done it on purpose to highlight the differences in both approaches and to present them in a very confrontational way.
At the end, I’ll try to summarize and to help you to decide when to choose Time and Materials and when Fixed Price cooperation model.
Time and Materials mode is better if you have not well defined scope of the project and you want to start very fast. If you like to change your mind or you want to try different thinks and you don’t like to hear “no” from the contractor. It would be also good if you have trust in people and reasonable approach to increasing the budget while the project goes further. Then the Time and Materials mode is for you and for your organization.
Fixed price is better, if you have defined your requirements and written them down in a standard notation. If you have some budget or time restrictions. If you accept that the contractor may be assertive and doesn’t want to welcome changes of scope during the project with open arms. Then fixed price is for you!