May 11, 2024

Billing Choice: Time and Material or Fixed Price

Payments are the most sensitive issue of any outstaffing or outsourcing agreement that can significantly affect technical aspects.

Written by
Serhii Uspenskyi
CEO

Table of Contents

When you decide to build a novelty marketplace, custom CRM or out-of-box mobile app you can be stunned by the available options: fixed-price or time and material billing.

Both parties of the deal want to receive whether services or money in exchange for their similar efforts without invoking their attorneys and going through other difficulties. Diverse hiring platforms like Upwork offer diverse security options to follow.

Both models, fixed price and time and material work if they applied correctly. The choice of the payment plan can affect the contractor’s type and expertise as well as workflow type, performance quality, and the whole project duration.

For startups and small business, budget is always a burning issue, for enterprises - security and deadlines. That’s why whatever your company status is it’s vital to comprehend the pros and cons of the payment ways to reach the project goals within the stipulated framework.

Time and Material

It implies reimbursement for the time spent on product development and required remedies for the execution. That’s why the project budget definition here starts with time estimation during a discovery phase that allows determining better product requirements.

Another factor that affects the amount is the rates of the chosen developers as well as any stipulated commissions, fees, etc. This payment approach is much more flexible and ergo more suitable for modern business requirements.

Pros: dynamic and flexible engagement, better cost-efficiency for both parties.

Cons: strict management requirements and budget adherence challenges.

Basically, a time and material contract can be applied for any project but the following situation it’s the most suitable for:

  • The concept with unclear or uncompleted requirements that can be changed, added or removed during the implementation.
  • Complex projects with known and hidden difficulties that can prolong the duration for an uncertain amount of time.
  • Custom payment scheduling and deliverable complexity are required to make the agreement convenient for both parties.

The most common form is a time and material hourly approach. It requires strict project management including time tracking, task execution updates, etc. to ensure that the paid hours are properly fulfilled. It can add complications to the agreement maintenance but give more control over project development.

Fixed Price

The common approach for a purchase - once a product is ready for acquirement. It was widely used until some of its gaps were noticed. When it comes to complex custom development it’s hard to assure that the initial list of requirements is accurate and complete.

Unlike time & material fixed price makes the contractor vulnerable to be forced to provide additional services for the initially stipulated money amount. On the other hand, though they had chosen budget amount protected clients couldn’t complete the product within the signed contract due to the lack of set requirements.

Pros: conditional predictability and transparency, simplified management.

Cons: low flexibility, high dependency between parties.

That’s why nowadays it has a smaller area of application and namely:

  • Small short-projects where each scope can be easily embraced and deadlines can be adhered like MVP or simple tools.
  • Development requests based on strictly limited funding if no changes on the go will be necessary.
  • The amount of work to do and the time to-do is clearly defined and no additional within the contract is possible.
  • Risks of concept implementation are stated in the contract and if they occur they'll be reimbursed.

    To take the pressure off a development team the money can be paid divided into certain amounts as a reimbursement for a milestone - a part of a project with defined functionality to implement.

How to choose a pricing model

Despite the outlined area of application for both payment models during decision-making, you should better focus on the following defining factors that can better describe your project.

Project: Its size and scope outline the amount of work, deadlines, security limits, etc. and their flexibility. Selecting between fixed price and time and material engagement you should focus on your product needs and aim for cost-efficiency.

Budget: The smaller initial numbers are the better planning and control should be established from day one to ensure product accomplishment. Neither of the models can provide 100% adherence to the amount if the agreement conflict with work estimation.

Contractor: Selecting a certain payment model narrows down the number of possible options. Freelancers or agencies can offer FP or time & material services or both based on their expertise and experience. The clause is negotiable and it’s better to consider their vision on the matter.

Payments: Each type dictates the billing frequency and outlines the possible amount per payment. Fixed price means a one-time but full-amount payment that can be significant depending on the complexity. With T&M you should be ready to provide timely reimbursements.

Supervision: Leaving out the project to the pros doesn’t completely free you up from the management duties if you want to get the desired product. To ensure the reasoning of your payments you should stipulate a certain tracking framework which is basic especially for the T&M model.

Methodology: The flexibility of workflow patterns directly correlates with the rigidify of billing models. For instance deployment of the agile methodologies like Scrum isn’t optimal within a fixed-priced agreement including in its milestone form that in any way sets more strict deadlines and goals.

Requirements: To ensure the delivery of the required product it should be fully described before the start. If it’s not possible that it’s better to mark it as a time & material project to set share conditions for both contract parties.

Time and material vs fixed price

Both approaches have their ups and downs but what is more significant are defined by your priorities and possibilities. For relative predictability and visibility of fixed-price, you receive less versatile, maintainable and tracked development. For flexible implementation with constant progress updates, you can’t be sure in final numbers and have regular management duties.

Nevertheless, a time and materials basis is a more goal-oriented approach. It created in mind with everybody’s interests: client, contractor and a product. Additionally, you can also go a mixed way. For instance, starting with MVP for fixed reimbursement and when you test both chosen features and your tech partner reliability you can engage yourself in the full product development on an hourly basis.

Customer retention is the key

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What are the most relevant factors to consider?

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Don’t overspend on growth marketing without good retention rates

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What’s the ideal customer retention rate?

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Next steps to increase your customer retention

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