is a single-sum contract where a service provider is accountable for completing the project within the agreed sum set out in the bond. It can be an effective choice in those cases when requirements, specifications, and rates are highly predictable, elsewise the cost will be anything but constant. A client should be able to share his clear vision of the product with developers to ensure appropriate final results.
It’s one of the most popular cooperation models because a fixed-price contract makes companies feel safe and secure. They have a set budget and thus are guaranteed not to pay anything more than that for the project. If a company needs to strictly plan their budget and expenses, this cooperation model admittedly sounds attractive.
When to use fixed price:
is the core factor that any entrepreneur seeks for in business. Company strategy usually requires clear deadlines and figures to be transferred to the budget. Planning expenses for 1–3 months ahead can provide you with exact figures. However, if product development will last for 4 months and more, it is only natural that you can hardly foresee overall outlays and in such cases other price models are advisable.
With specified requirements, fixed budget and pre-arranged deadlines — there won’t be any surprises. Regular project management interaction with the contractor ensures scope compliance and protects margins.
Payments to the service provider are mainly based on a percentage of work performed. Such workflow requires little involvement since expectations are transparent and predictable.
There’s no guarantee you won’t go over budget. Any change in requirements requires budget renegotiation, and if something goes wrong, your product will need fixing and improvements, which also consumes the budget.
is the major weak point of fixed-fee agreement. As a customer, you are responsible for any emergent changes that you’ve initialized or those ones that are beyond the vendor’s competence.
can be referred to as both pros and cons, depending upon each particular case. Such an approach doesn’t comprise regular reports and interactions between the customer and team. All the management is mainly carried out by the team member, so you don’t have to allocate timeslots for deep project involvement. Nevertheless, it doesn’t mean that you’ll be in the dark about the workflow.
take a long time. Before you can start the project, you need to analyze the market and predict what will work for your users and business. The contract needs to specify it in detail, and developers need to know the scope of work thoroughly.
In software development, it’s hard to predict so many aspects upfront. You can’t have a finger on the pulse - you revise the product once it’s finished. There’s a risk connected to the quality of a product and the fact that it will fulfil your requirements, and another, connected to possible changes and challenges that may affect the budget. Plus, you need to remember that you pay for each change that wasn’t covered in a contract.
contract is absolutely different. It presupposes billing clients for actual work scope based on hourly rates of labor. Customers are charged for the amount of hours spent on a specific project, plus costs of materials. The main advantage of T&M model is flexibility and opportunity to adjust requirements, shift directions, replace features, and involve users to get the very product.
When to use T&M:
natural that you can hardly foresee overall outlays and in such cases other price models are advisable. Transparency. With specified requirements, fixed budget and pre-arranged deadlines — there won’t be any surprises. Regular project management interaction with the contractor ensures scope compliance and protects margins. Ease of management. Payments to the service provider are mainly based on a percentage of work performed. Such workflow requires little involvement since expectations are transparent and predictable. Disadvantages:
Lack of flexibility is the major weak point of fixed-fee agreement. As a customer, you are responsible for any emergent changes that you’ve initialized or those ones that are beyond the vendor’s competence. Less accountability can be referred to as both pros and cons, depending upon each particular case. Such an approach doesn’t comprise regular reports and interactions between the customer and team. All the management is mainly carried out by the team member, so you don’t have to allocate timeslots for deep project involvement. Nevertheless, it doesn’t mean that you’ll be in the dark about the workflow.
Unit-price contracts allow businesses to modify the volume of work, revise materials or designs, shift the focus or change features following the project implementation.
is one of the key features within larger projects. There can be a general goal that should be achieved, however knowing how it’ll be reached is not that important beforehand. Often for startups and mid-sized companies, it is better to make decisions in the process, evolving a strategy and building custom software simultaneously. Such approach underlies Agile methodology.
Avoiding fixed-price bidding process helps to save time and start immediately. Moreover, blended rates allow you to see how much time the team spends on each feature and commit, and so motivate it to work more efficiently.
In fact, with a time and material contract, you are more flexible in terms of budget management. You can scale the team up or down, and end the contract when you need it.
is the main disadvantage of a T&M contract. The overall cost can go far beyond the expected budget.
is required from you to make sure that the team is delivering toward the approved scope and within the correct amount of hours.
The truth is, a good contractor will most likely start a project with a Discovery Phase. Therefore, you won’t need to worry about too little time spent on analyzing the functionalities and features that your future product needs. Detailed plans made before the development kicks off don’t prevent budget overruns and don’t guarantee the quality of the final outcome.
When agreeing on a T&M contract, clearly define these key details:
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