Time & Material vs Fixed Price Model for Software Development

October 16, 2024

Businesses looking to stand out in the digital world with their outsourced software development. It usually confront two main models: Time and materials and fixed price. However, it can be quite complicated to choose any one of them. This choice is not always about economic risks and benefits. It hugely impacts the nature of the vendor’s corporation and the project’s flows. 

These two models involve making different assumptions regarding the project and taking different approaches to the software development process. The fixed price model approaches product development in a linear, sequential manner. The time and material model considers it an incremental and iterative process. Each model, as usual, is reflected in the RFP response and is best suited for specific software development projects.

So, are you disoriented about these pricing models?
The benefits and drawbacks of each pricing model help you answer the most pressing question: Which one should you choose as the right pricing contract when choosing software development services? We will also discuss how these pricing contracts influence full cycle software development.

Time And Material Contract VS Fixed Price

There is no universal truth about which model works best. This depends explicitly on a particular project’s requirements. Below, we have shared detailed information about both pricing contracts—fixed price vs. time and material. Both pricing models are discussed separately, focusing on an overall detailed understanding. 

Fixed Price Models

In the fixed-price model, the mobile app development company estimates the project cost to the client, defining the overall scope of work, delivery cost, timeframe, etc. In this pricing model, businesses get all the information at the start of the project.

 Although this contractual agreement provides cost predictability for businesses, it may place more risk on the seller, especially if the project requirements need to be better defined or unforeseen circumstances arise. The choice of contract type depends on the nature of the project and the risk preferences of the parties involved. 

While this is a settled contract for your project, where the cost and time are estimated before the beginning of the project, it is not as smooth as it looks. But why? 

Let’s understand this by an instance– 

Everything is decided, from the cost to the time frame, features to technology, and two weeks later, when you want to add something new to your software development, you get a refusal because everything is discussed and fixed in advance. In this situation, you are left with the only option of investing an extra amount to make changes to your software. 

This is how this fixed price model works— an already-settled project contract with fixed costs, business requirements, and delivery dates. Since everything is fixed in advance, you can’t make any modifications. 

Advantages of Fixed Price Models

The fixed price model is advantageous in several cases. Want to know how? Explore these benefits: 

• Easy budget management

Businesses are aware of the project cost and delivery date at the beginning of the project. Depending on the software’s complexity, it can take several weeks or even a month. 

• Little management efforts 

Businesses can experience the need of involvement of mobile app developers during the planning stage. However, once the development begins businesses get the resources freed up to narrow down the involvement to scope compliance check, which is convenient to do with a very specific consideration and a limited timeline. 

• Clarity on the project outcomes

You have an elaborate understanding of what your software will be capable of right at the beginning of the project, so you have time to make it a thought-out part of your business strategy (for example, estimate its influence on business processes, prepare a plan on adopting software and integrating it into your employees’ workflows).

Disadvantages Of Fixed Price 

• Slow Project Launch

As a precondition for the fixed-price development model, a project must have a detailed specification of the software when created, which could lead to several weeks or even a month of software development. 

• Lact in Flexibility

Any changes you may want to introduce further in the project (for example, driven by shifts in market conditions or your business strategy) would require separate negotiation and payment and can stall development.

• Inability to try the software before it’s delivered

Although you control the progress of the software development team, you can’t see the software in practice before the last development stage and ensure it fully aligns with your expectations. Correcting any inconsistencies at the final stage would be costly: a lengthy adjustment of a testing process can result in a whole new project in some cases.

Use Cases Of Fixed Price Model 

Looking at the benefits, this pricing model seems more convenient, but the disadvantages can let you down. That’s when the question raises: “Is it even worth it to use a fixed-price model?” Let’s understand this by having knowledge of its use. 

Time and material (T&M) Model 

With a time and material contract, the project will be charged for the actual time spent on development based on an hourly rate for each outsourced specialist involved. 

The projects based on the time and material model are Agile-oriented. As a rule, a vendor issues monthly invoices accompanied by reports to give you an integrated insight into the work completed.

Time & Material Model Pros

• Adaptability

Together with a vendor, you agree on a project roadmap and set related milestones, but the scope of work remains dynamic and can be changed as you see fit. You can make informed decisions on the next steps of development, drawing on the outcomes of the previous ones (end-user feedback) and the analysis of the latest market tendencies.

• Fast project launch

The planning stage is shorter compared to a fixed price project as software specifications don’t need to be as detailed, meaning you can start the active work on software development earlier.

• Continuous quality assurance

T&M-based development goes in hand with continuous testing to verify the implementation of requested changes and new features so the software gets honed to perfection throughout multiple project iterations.

T&M Cons

Uncertain budget and deadlines

The final cost can exceed the expected budget, and the same applies to the release dates. One way to add some clarity is to measure a team’s progress with KPIs that help predict and plan the scope of work more precisely over time (such KPIs are team velocity, lead time, and cycle time). For more information, you can refer to our CTO’s article on the project health KPIs.

Increased management efforts

Although the T&M model allows you to control the deliverables, you still need to allocate enough resources to collaborate with a vendor and provide prompt feedback to maintain a steady development pace.

Use Cases Of Fixed Price Model 

The Time & Material (T&M) model offers notable flexibility in custom application development, making it appealing for various project types, but its open-ended nature can pose challenges. For projects with evolving or unclear requirements, the T&M model provides the agility to accommodate changes as the project progresses. It’s also beneficial for research and development initiatives with uncertain outcomes or long-term projects with multiple phases and shifting needs. It’s well-suited for complex projects with high uncertainty or when ongoing maintenance and stakeholder inputs are crucial. Understanding these use cases can clarify whether the T&M model aligns with your project needs.

How Much Time Does it Take to Build Software with Fixed Price vs Time and Material

The time required to build software differs significantly between the fixed price vs time and material models. With a fixed price contract vs time and material, the fixed price approach often involves extensive upfront planning and specification, which can delay the project start by weeks or even months. 

In contrast, a time and material contract vs. a fixed price allows for a quicker launch, as detailed specifications aren’t needed upfront. However, the T&M model may extend over time due to ongoing adjustments and iterations. Ultimately, the project’s scope and flexibility influence how long each approach takes, as does the fixed price level of effort vs. time and material.

Cost to Build Software with Fixed Price vs Time and Material

The cost to build software using a fixed price vs time and material model can vary greatly. With a fixed-price contract, you know the total cost upfront, as it’s agreed upon before development begins. However, this model can become expensive if unforeseen changes are needed, requiring renegotiation or extra costs for modifications.

On the other hand, in a time and material contract vs fixed price, costs are flexible and dependent on the hours worked and resources used. While this allows for adaptability, the final cost is less predictable and may exceed the initial budget, especially in projects with evolving requirements.

What RichestSoft offers Fixed in Price vs Time and Material

RichestSoft offers both Fixed Price and Time and Material (T&M) engagement models for software development, tailored to meet the unique needs of each project:

Fixed Price Model

1. Predefined Scope & Budget: We offer projects with a fixed budget and timeline, ideal for clients with clear and detailed project specifications.

2. Guaranteed Delivery: Once the project scope is agreed upon, we ensure timely delivery with no changes in the cost.

3. Limited Client Involvement: Minimal client oversight is required, making it ideal for those seeking a hands-off approach during development.

Time & Material Model

1. Flexible Development: This model allows for ongoing changes and adjustments during the project, accommodating evolving requirements.

2. Pay for Actual Efforts: Clients are billed based on actual hours spent, making it ideal for complex or dynamic projects.

3. Close Collaboration: Continuous client involvement ensures the project evolves according to feedback and market changes.

RichestSoft provides both models with transparent communication, ensuring businesses choose the one best suited to their needs.

Conclusion

Selecting between the Fixed Price and Time & Material (T&M) models ultimately depends on the nature of your project, its scope, and your business requirements. The Fixed Price model is ideal for projects with well-defined goals, a fixed budget, and a clear timeline, offering predictability and minimal management efforts. However, it lacks flexibility, making it less suitable for projects requiring adjustments or ongoing changes.

On the other hand, the Time & Material model provides greater adaptability, allowing for continuous feedback and iteration, which is crucial for complex, long-term projects or those with evolving requirements. While it offers flexibility, it demands closer collaboration and could lead to budget overruns if not managed effectively.

RichestSoft offers both models, ensuring businesses can choose the most appropriate one based on their unique needs, project scope, and operational objectives while delivering high-quality solutions with transparency and efficiency.