Time & Materials or Fixed-Price? What type of contract should you go for?

business meeting

Your software project – from idea to life:

Congratulations! Your new idea was born!

You’ve been dreaming about this new app that will possibly change the way people do things or will help them get their tasks done more efficiently or even help them develop a new habit. 

The idea is already settled in your brain and whenever you close your eyes you can imagine more or less how you want it created.

And now comes the moment to bring your idea to life and proudly show it to the world. 

You wisely decide to start with an MVP (minimum viable product) to 1- test the market feedback and 2- leave room for improvement and competitiveness.

But, you know you are not a programmer, and you don’t have the in-house resources to create your idea.

So, in your case, your way to go is to outsource the project to a good software house.

You did your initial search, asked for referrals and narrowed your search down to a few software houses.

You start thinking about the actual budget you need to allocate.

And before deciding which software houses have the best offer for your project, you find yourself facing the unavoidable – and frequently confusing – questions: 

Which type of contract should you go for? 

Which contract type will bring you closer to what you need and provide you with the best value for your money on the long-term? 

Would you like to tell us about your idea and get an estimate?
We would love to hear from you.

Fixed-Price contract

A fixed-price contract is a contract that describes and defines the service to be provided very specifically while setting a single price for the whole project.

The project scope is firmly fixed and cannot be changed during the development process.

The timeline is strictly determined regardless from the number of hours spent by the developing team.

In this contract, all known risks that can occur during the process are calculated and included in the price. Regardless from whether these risks may or may not occur, the customer still has to pay for them.

It’s usually paid in milestones form: 

A down payment followed by one or several milestones as the project progresses and a final payment when the project is completed.

Pros of FP contract:

  1. You pay for the completed scope of work
  2. You know beforehand the expected amount you will pay before the project starts
  3. Strict deadlines: the deadlines are agreed upon before the project starts
  4. Timeline: When the developers have the complete list of features that power the app. They can develop the roadmap and plan the workload of a development team. It is easy to complete the project on time when you have a precise plan.
  5. Management made easy: When all the project features are well documented through this type of contract, it becomes easier and quicker to pass them down to the development team without getting back to you (customer) again for approval.

Cons of FP contract:

  1. Detailed project scope is developed and approved before the work starts, which delays the project start.
  2. Lack of flexibility: If you decide to change your requirements during the process, you would be additionally charged.
  3. Consequently, for a Fixed-Price contract to yield the best results, the project requirements and scope of work have to be very detailed and specific before the contract starts. It is a bit difficult to achieve in today’s fast-changing technology world.

You have to have a very detailed agreement with the software house on what the contract will include in terms of work done.

One won’t be able to develop new ideas as the project process, which doesn’t fit into today’s fast-changing trends and competition.

You will pay extra money if you decide to bring a new feature to the project.

  1. You and your developers will be taking some risk by choosing this type of contract.
  2. Less liability on the developing team: they are just carrying the description provided in your project specification. They won’t be able to give you their technical feedback.

Time & Materials contract

The Time & Materials contract is completely different from the FP contract and it’s best for agile development projects.

Let’s have a look at how this model works:

  • You bring the project to the chosen software house during the first call or meeting (or project workshop). The development team and the business analysts discuss with you all the details and requirements and they start developing the project specification.
  • Once the specs are ready, the development team divides the development process into several milestones.
  • Those milestones will be again divided into sprints –a default unit of time measurements that usually lasts between one and two weeks-.
  • As soon as the first sprint is ready and complete, the development team and you (the customer) set up a meeting to discuss the process and results. 
  • Together, you develop a backlog (the list of features that will be implemented in future). This backlog represents a well-documented report that includes the strict priorities that all new features will have.
  • Following this meeting, the development team starts planning the second sprint considering the backlog and the milestones.

This procedure of Time & Materials contract ensures that the developers add value to enrich the original specifications with the new features from each sprint.

Consequently, your product is more flexible and ready to meet and satisfy the market (end-user) needs by adding competitiveness to it.

With a signed Time & Material contract, you are billed either monthly or after every sprint, based on the number of hours spent by the development team plus the cost of materials that were required to realize the project (for example hardware, custom software licenses, etc.).

In a Time & Materials contract, there are no hidden costs included, ex: The estimated risks.

Pros of Time & Materials contract:

1. Flexibility:

This is the #1 advantage that comes with a Time & Materials contract.

You will have the possibility to make re-designs or even shift the project focus even after the project already started.

You can even modify the development team.

2. Ongoing decisions:

Time and Materials contract allows you to make ongoing decisions.

This works great for small and medium companies in order to avoid adding any extra risk or threat to your company’s workflow and stability.

3. Liability: 

The Time & Materials contract ensures that you receive a whole project. 

This process makes the development team think while writing every single line of code because the team knows that they will be maintaining the project and possibly developing new features in the future.

4. Customization:
Time & Materials model allows you to build unique and complete applications that are sure to satisfy you and your customers.

With a Time & Materials contract, the project specifications can be improved during the development process by adding new functions and features and therefore improving your final product.

5. Instant start:

The Times & Materials helps you and the development team to start the process with only a few basic features. And you will have the total freedom to add other features and specs during the following several sprints.

Cons of Times & Materials contract:

1. Undetermined budget:

This point might seem like the biggest disadvantage when it comes to choosing the Time & Materials model.

But, if you consider the long-term benefits coming with a Time & Materials contract, you will be able to see why it could be the best choice for you: 

  • The developers of the solution/software are the same developers who will add new features and update the code or the software. 
  • A mutual understanding will develop and solidify during the several sprints, leading to a best version of your final product.
2. Undetermined deadline:

Now you know that the development process consists of several sprints, but neither you nor the developers can predict how many sprints are needed, which could cause the project to look like infinity.

This issue can be overcome if the developers deliver the new version of a product after each sprint, and push it into production as soon as possible with the continuous integration tools.

In this case, the users get the latest version, and the developers and customer collect feedback.

Such an approach helps you to earn profits from beta and it will proof the value of the application for the users.

Which contract is best for you?

Here are our recommendations to help you make your final decision:

When to choose a Fixed-Price contract?

A Fixed-Price contract is your best choice in the following cases:

a) It’s ideal when you require work that has a quick or very quick turnaround and where much of the work has been already completed before choosing the new contract.

Example: A website built from already available templates.

b) One-time job: when the developers are required to create a small part of one enormous project/solution; without the need of a future customer support or maintenance or updates.

When to choose a Time & Materials contract?

A Time & Material contract becomes your best choice when:

a) You are developing a startup:

You know the harsh reality of startups. You need to develop a prototype of your product and validate it as fast as possible before you run out of money.

In this case, a fixed-price contract will represent an insurmountable obstacle towards achieving your goal. 

And here comes a Time & Materials contract to give you the necessary flexibility and support through the whole process with the possibility of testing beta versions and adjust according to feedback.

Because, you need first to have an MVP to prove the idea, but then, after your concept has been validated, you will need to improve it continually.

And since startups don’t have strict deadlines or specs, but it’s rather about the value they bring to their customers, Time & Materials is the best choice here.

b) You have a big and complex project:

Where for example you outsource the project to various software developers and each development team is focused on a specific part of the project.

A flexible team here will be an added value to your project.

This makes the Time & Materials contract your best choice.

Would you like to tell us about your idea and get an estimate?
We would love to hear from you.

More To Explore

photo of people using laptops

How to hire the right software house?

Choosing the right software house for you can be a priceless decision! It’s not only about cost but also the value-for-your-money that you will receive.