Software Development Contracts: Fixed Price vs. Time and Materials

 

When choosing an IT company to start cooperating with them, it’s worth to pay some attention to types of software development contracts that are mostly used nowadays. The two most major of them are fixed price development contract and time and materials contract. Both have their strong and weak sides and each is suitable for its peculiar purposes.

 

What is Fixed Price model good for?

Signing a fixed price development contract assumes that your project is strictly planned and has everything laid out, with an established budget that wouldn’t likely change during the development cycle. Exact project delivery terms are usually established, too. Upon the start of the development, the contractor usually takes the risks of breaking the terms and late project delivery, making this model an absolute opposite of what is called flexibility.

fixed price development model

 

In most cases it is suitable to pick fixed price model to develop a small product, say, an MVP, with strictly limited functionality which is very unlikely to be changed during the development. Key aspects of this contract model are:

  • Fixed budget
     

  • Fixed project delivery terms
     

  • A fixed amount of work to be done
     

  • Non-availability to make any changes or additions to project requirements
     

  • Higher development rates
     

  • Possible setbacks concerning end product’s quality

On another side, fixed price development model could be suitable for you, ensuring that you know the bottom line price and time that your project will be delivered. Digging deeper, most of the times you’ll get everything delivered in time, but the quality might be seriously questionable, and, probably, you would need to find another team to finish the product and bring it to an acceptable level.

 

What is Time and Materials model good for?

Don’t get confused by the word “Time” in the title — you are not actually paying for the time that your project gets shaped, it supposes payment on completion and delivery. Long story short, that’s approximately how it works like:
 

  1. The project is being broken into tasks, each being estimated separately, so you have more flexibility concerning changes and additions to project’s scope;
     

  2. Project management team evaluates the first tasks and warns you on how many development hours are required to implement it;
     

  3. Developer’s hourly rates are multiplied by the number of work-hours and now you know how much exactly it’d cost you, and if you agree, the process starts;
     

  4. When the task is finished and you have the first results, payments are made. Most of the times this question is discussed individually — the customer can pay after each sprint, each month or quarter, and so on.

 

When establishing the cooperation with a team using the time and materials model, the developers are interested in delivering qualitative results in time, in order to continue working on the project.

time and materials development model

 

Just a single disadvantage could be highlighted in time and materials contract model — you always have to uphold a communication link with your developers. Sometimes this might be uncomfortable, especially if your time zones don’t synchronize, but on the other hand, usually, the more you talk about the project, the more precision and quality is put to work. Discussing the details, you always know what the stage your project is on, and it’s always easy to add any changes or improvements.

 

Which contract model is better to choose?

Major companies advise signing time and materials contract instead of fixed price software development model in case you are building a serious and large-scale project, such as CRM systems, logistics services or big eCommerce solutions. It is more than typical that at first customer doesn’t know in its entirety what the exact functionality he needs in the product.

Summing up the line, few more benefits of using time and material development contract are:
 

  • flexible payment model, perfectly compatible with Agile software development methodology;
     

  • developer’s rates are transparent and let the customer to easily control the whole process, including budget, tasks, and terms of delivery;
     

  • constantly communicating, you are more likely to get a highly qualitative solution, matching or even exceeding the expected result.

Diving deeper into the project and iterating helps the team and the customer to know and understand each other’s needs and project’s functionality, and that’s where new ideas and improvements towards the end product are born.