The inflating costs of software development leave you indecisive while choosing the right pricing models.
Most firms find it ideal to have an inhouse software development team for all your projects. But not all organizations have a continuous funnel of software development projects to sustain such a team, hence they are in search of the right development team to get their software created.
Based on your requirements, there are numerous development models that you can utilize, from the standard waterfall model, iterative, rapid development, agile development, DevOps or a combination of these.
After finalizing the Development model, you can engage in a contract with an outsourcing firm. The only problem being, not all delivery models are compatible with each type of pricing contract.
What type of Contract do you prefer while outsourcing your software development?
A Fixed Price Contract and Time and Material Contract are generically used agreements throughout the market. Each has its own pros & cons and is compatible with certain development methodologies. Hence, it is important to align your development approach with the right pricing contract. Below, we will discuss what they are and the differences between T&M and fixed-price model contract management.
What is a Fixed Price Contract?
As the name suggests, the Fixed Price contract, lets you know upfront how much it would cost you to develop the entire software. A Fixed Price Contract highlights
- Finalized software requirements
- Price of Software development and project management
- Timelines according to the stages in which the product will be developed.
A fixed price contract requires stable requirements and a predictive process. This ensures that the development methodology can be planned and monitored on the progress. A predictive process helps lay down the number of people, resources and timelines of the project.
Standard development models like waterfall, iterative or spiral are apt for getting into a Fixed Price Contract, as they provide the predictability that the pricing model needs.
What is a Time & Material Contract?
In a Time & Material Contract, you are billed on the actual efforts that are spent developing the software, irrespective of the stage of the development.
A Time and Material Contract includes:
- Hourly/Weekly/Monthly cost of resources
- Term for which the resources are acquired
- Technology and Skill level of resources
- Work timelines related agreements
Along with human resources, some software development firms also charge based on the inhouse applications that are utilized during the development process. A basic draft of the requirements is agreed upon at the beginning of the project. These requirements evolve as the project moves ahead.
Time and Material Contract is compatible with all development models, yet the rapid development model or agile development model is perfect for a Time and Material agreement.
Comparison: Time & Material vs Fixed Price Projects
|
Fixed Price Contract |
Time & Material Contract |
| Software Requirements | |
|
The Requirements are frozen at the start of the project and estimates are made based on those requirements. |
The requirements for the MVP are defined at the beginning. This MVP can be broken down into User Stories for clarity. These requirements can evolve as the software gets created. |
| Resource Estimation | |
|
The Resource estimation for the entire project is done beforehand. Based on the Wireframes designed the number of resources required at each stage of the project is decided. |
The resource requirements vary based on the user stories and changes introduced. They can extend in case a complex feature-intensive delivery and can reduce when the changes are simplistic. |
| Budget | |
|
The cost of developing the entire product is estimated once the requirements are frozen. Cost is revisited in a Fixed Price project when a change is introduced, each change would involve a plan realignment. |
Efforts are estimated, based on the resources required to develop each User Story. The combination of these deliverables can be used for the budget estimation. Hence, as each User Story is taken up, (parallelly or sequentially) the resources and utilities on each can be defined. |
| Development Model | |
|
A standard waterfall development model gives a Fixed Price Contract the predictability it needs. In a few cases, iterations are introduced to improve software quality. Each stage is executed linearly with predefined timelines. |
Time and Material can work with both a standard or an agile development process. |
| Change Management | |
|
A change cannot be accommodated by this model. Some organizations initially agree on the price of each Change that will be introduced, and a Change Request is created for it to be executed. |
Can accommodate change requests easily. Resources and timelines are flexible and can be adjusted based on the revised course. |
| Timelines | |
|
The timelines for the development of the entire software are predefined and the development firm should adhere to it as it is contractually bound. |
Timelines for individual iterations are defined. The timelines for delivery of MVP are defined considering no dynamic changes in the requirements. |
When should you go for a Fixed Price Contract?
When you have fixed software requirements, and you see no changes in the future till the time of project completion you can opt for the Fixed Price Contract.
The primary exercise of Fixed Price Contract is drilling to the core of the software specifications, which takes a lot of initial efforts. You need to be spot-on with your wireframes, as the software to be developed will align with these specifications. In case you fail to compile all requirements at the very beginning, it will result in additional costs of introducing changes later during development.
Enterprise systems, Software with Scientific, Medical or Industrial applications, Finance and Trading core systems are a few examples which do not expect dynamic changes in the requirements. Projects that have minimal requirements and scope, with very few user interfaces and focused applications can utilize this model.
When should you go for a Time and Material Contract?
When your requirements are not clearly defined or they cannot be formulated instantly and will evolve as the software development goes ahead, you should go for a Time and Material Contract.
Time and Material Contract doesn’t bind you to freeze all your requirements at the very beginning. Projects that anticipate a future change in customer behavior or business processes want to keep the scope of their projects flexible.
Mobile Applications, Website development, Web app development, BI, Machine Learning and Artificial Intelligence projects are ones, which expect modifications in the scope as the software is being developed. Long-term projects that need their software to be ever-evolving with the marketplace to keep themselves updated should go for a Time and Material Contract.
Advantages and Disadvantages of Time and Materials Model & Fixed Price Model Contract Management
Pros of Fixed Price Model:
In a fixed-fee contract, everything about the project is determined and fixed. There is clarity on the project scope and requirements, and both clients and team members know what to expect. The budget is also fixed; for a software development company, there is reduced risk.
The deadlines are clear, and every milestone is considered. This is very important as many clients care about the time-to-market. Fixed-price contracts are ideal for customers who don't want to get personally involved in project management. The team plans from concept to finish, and the software development company follows through. Businesses can focus on their existing operations, and there is no need to control too much of what's happening. Projects progress naturally.
Cons of Fixed Price Model:
The cost of the project may be higher, and some projects can require substantial investment
If the market is volatile, the budget may not be flexible enough to accommodate its fluctuations
Fixed price contracts require longer planning and accurate pricing estimates for businesses. The deadlines may be short as well for some ongoing cases.
Pros of Time and Materials Contract Model:
- The best benefits of T&M contract models come from their offering clients a high degree of customization. Every project is unique, and a T&M model can satisfy varying project requirements. If a goal evolves or specifications change, the project adapts to meet it.
- Time and Materials contracts are open to several changes and adjustments. Organizations can add, remove, or improve any feature as needed without worrying about limits or constraints as long as they have the budget.
- Time and Materials contracts are ideal for environments with variable and increasingly dynamic decision-making processes. They are best for Agile development workflows; clients can attend meetings regularly to discuss progress, optimize changes, plan next steps, or make further iterations.
Cons of Time and Materials Contract Model:
- There is a lack of budgeting control, and a project can quickly spiral down financially. The project manager may need to pay much more than what's expected. There are no specific timelines or planned schedules for the scope of work.
- Clients must be part of the team and get involved in the project with the Time and Materials Contract Model. It may not be the best fit for every organization for that reason.
- Since this type of contract is highly flexible, risks are associated with the added flexibility. Unknown variables and project outliers can be ordinary circumstances.
Conclusion:
To avoid the Time and Material vs Fixed price situation, multiple combinations of these models are also used to build hybrid delivery models. Newer delivery models work on unique features, which provide you the benefits of both Time & Material and Fixed Price to some extent. At the beginning of a project, you need to decide in which areas you can be rigid with your requirements and the areas in which you can expect fluctuations.
Steps to follow before moving ahead would be –
- List down all Your requirements.
- Create detailed wireframes based on them.
- Rate them on the degree of fluctuation you expect.
- Based on the ratio of fixed to variable user stories you can decide on which model would be most apt.
Having a correct estimation of the project and foresight will help you make the right decision to go with either one or both.
