Pricing model strategy | Fixed Price or Time and Material?

Before the development starts, business owner needs to decide which type of payment model they should follow. The most widespread are fixed price and time&material. It is essential to analyze which one fits your future product. In this article we are going to outline major pros and cons for each type of contract, so you can make a decision.

Time and Materials model. What is it?

A Time and Material (T&M) and fixed price models are completely different approaches. It involves billing clients for the number of hours spent on the project and the cost of the materials needed. Although hourly wages are fixed, it is often difficult to estimate the total cost of a project. However, this pricing model offers much more flexibility when adjusting requirements and changing directions. Then you don't need to give a software company a clear vision. It is recommended to choose a T&M contract for larger projects, for example, developing a mobile application, as many unexpected tasks can arise during the development process.

Fixed Price model. What is it?

A fixed-price agreement implies payment of a specific amount of money that was agreed upon at the start of the project. The deadline for the project is also stated in the contract, so this binds the development company to provide the final product within the timeframe. In most cases, a client pays 50% of the contract up front and the rest 50% when the product is ready. You may think that a fixed-price contract is cheaper and more predictable but it is not always true. The fixed price model doesn't give flexibility in the scope of tasks. If the product owner decides to change something, it will not be possible. Or if it is, then an additional contract will be signed. This type of agreement is good for small projects like a website or landing page.

Advantages and disadvantages

Below we are going to oppose advantages and disadvantages of the two models, so it is easier to figure out which one will work for your future business.

Time and Materials Advantages

Faster development start and more place for scope flexibility

We know that in the agile development world tasks and requirements can change with time for different reasons. Time and material approach will save you time as you do not need to specify all the little details. This way it is possible to start development earlier and release the product faster.

Once MVP is released and user feedback is collected, working in the model will allow you to easier scale the project.

More transparency in development process

You pay for the hours spent on development. This way it is easy to track the progress and how much time is spent on specific types of tasks. If you haven't had much experience in development procedures before, it will help in future planning.

Ability to implement changes per product owner's feedback

This model allows introducing changes in the middle of the development process. For example, when business owners tested a build, they understand that a different UI layout should be implemented because it benefits the product. And it will be totally fine, whereas the Fixed price contract restricts such changes.

Fixed Price Advantages

No extra payments

With the fixed price contract you can stay calm and don't worry that you will run out of the budget. The cost is predictable which gives assurance that the product will be finished and left halfway because of going into the red.

However, a very important thing to keep in mind that if some complications happen, developers will have to search for workarounds that can be costly to fix or change in the future.

More time for the further planning

Since all the requirements must be described and provided in advance, the product owner will have enough time to plan other important things for their business, like product launch, post MVP development or strategy for further investments.

Fixed price disadvantages

You may have a clear idea of what the final result should look like. You know how to describe what you need to do in technical terms. But this is not enough.

The theory is always less accurate and predictable than practical experience. The best ideas for improving your product can come up during the development process. But if you chose a fixed-price contract, it will be difficult to apply the changes. You will need to indicate the required changes and ask the team to re-evaluate. This will slow you down every time you want to make changes.

In short, the Fixed Price model is not meant to change. But since we live in an ever-changing world, this must be considered when developing a product, which is difficult in a Fixed Price model.

Impossibility of flexible changes

This model limits the number of changes that can be added to the scope. So you must be excellent with writing product requirements. If you don't have a technical background there are more chances to make a mistake or even miss something.

Limited control over quality

Developers will be limited in time for bug fixing and if any complex difficulty arises, the fix should be fast, which doesn't guarantee that it will be the best option. If the team works without QA engineers it amplifies the risks that not all bugs will be caught during the development.

Not recommended for complex software products

If the product is bigger than a landing page or a site, it is not recommended to go for the fixed price. Complex products have very changing nature and quite often the scope of tasks and priority change.

Summary

Picking the right pricing model is as essential as choosing a technology stack for future products. Generally, we recommend going with the time and material option. It gives flexibility, gives a clear understanding of spends, and is a good fit for an agile environment.