Fixed price or time material

In my daily work, I constantly deal with a question that interests my customers.

Dedicated Team, Fixed Price or Time&Material: What to Choose for a Project?

In this post, I would like to compare the dedicated team, fixed price, and time and material outsourcing models, analyze each in detail, and provide tips on how to choose the appropriate model for your startup project. In addition, I would like to describe the advantages and disadvantages of this three models of cooperation with IT company.

Fixed Price Approach

This model is suitable if you have well-defined and not large scope of work. Fixed Price, as its name suggests, presupposes that all potential risks are handled by your vendor company. Time, budget, and scope are fixed. This approach is characterized by the following:

• Minimum customer’s involvement;
• Fixed timeframe and budget;
• When you have a limited/fixed budget;
• When developing an MVP;
• When you have clear project requirements and deadlines;
• Well-documented and well-elaborated requirements;
• One-off project delivery.

Advantages of the fixed price model:

• The cost of work is agreed before signing the software development contract.
• The terms of work are clear; stages and terms of development are approved by the client and developers, so the project is likely to be ready and delivered on time.
• The development process is coordinated by a project manager, so the client's participation isn’t necessary.
• There’s a low risk of losing funds.

Disadvantages of the fixed price model:

• Risk management is complex as there’s little control over the development process.
• Lack of communication is a concern as this model doesn’t provide for frequent client communication with the outsourcing team.
• A long preparation period is needed as all requirements for implementation and deadlines must be documented.

The time and material model involves payment for the time and effort spent on development — that is, for the actual time spent implementing planned project functionality. This type of contract is one of the most common in outsourcing. It’s considered convenient, relatively flexible, and capable of adapting to any changes. As for the budget, the actual cost may differ from the estimated cost. Payment is made monthly on the basis of actual work performed.

Advantages of the time and material model:

• A flexible approach to development (this model differs from other models in its approach to defining and managing the scope of work).
• The possibility to clearly define project priorities is suitable for small companies and startups.
• Time management (tight scheduling allows you to concentrate on important elements of the project).
• Cost control and budget flexibility.
• Scalability and rapid adaptation to needs/market requirements gives flexibility to make changes to the project.
• Practical involvement of the client in the development process in order to monitor the performance of a certain work schedule in accordance with the expected results.

Disadvantages of the time and material model:

• In spite of budget flexibility, at a startup it’s quite logical that you may not have complete information to assess the project budget, so it’s difficult to accurately estimate the amount of required investment.
• To achieve a high-quality product, continuous communication with the outsourcing provider is necessary.
• The time frames for development of the final product are rather blurry due to the uncertain scope of the project.

The dedicated team model is used for long-term projects where requirements are unclear and vary with changes in the scope. This model is favored by businessmen and corporate customers. It presupposes that all risks are shared between you and your contractor. There is no fixed price but a fixed payment. It is also used when the customer’s own team doesn’t have skills or expertise in certain areas. A dedicated outsourcing team can be connected to a client’s team to perform high-quality, unique, and specific projects without expanding the client’s core team.

Dedicated Team model has the following characteristics:

• Maximum customer’s involvement;
• Flexible timeframe and budget;
• Changing requirements;
• Experts who meet all the criteria gather in one team and begin work;
• Team leaders control the implementation of the planned work schedule;
• Team leaders manage requirements, monitor the status of the project, report on the status to the client, and make proposals for project management.

Advantages of the dedicated team model:

• Economic efficiency: Hiring a dedicated team is more economical than assembling a team independently, which is laborious and time-consuming.
• A focused approach allows you to concentrate and immerse yourself fully in the project. When a team is focused on one project, it ensures the best results. In turn, this model gives flexibility to reconfigure the team at each stage depending on requirements.
• Cooperation between the client and the team allows for effective planning and evaluating the strengths and weaknesses of the work process.
• Continuous development allows you to improve existing functionality and add new functionality.
• The ability to optimize the product is important for product growth.

Disadvantages of the dedicated team model:

• Inefficient for short-term projects. This model is effective only for long-term projects.
• Selecting a team that can achieve the project’s goals can be a long process, and the client has to be involved in hiring team members.

Which Is Better?

Fixed Price contracts presuppose re-estimations of a cost in case of any change occurs. Dedicated Team contracts are more flexible in such cases. However, the latter approach requires your active involvement, while the former puts all potential risks on your contractor’s shoulders. The Dedicated Team approach is a preferable option when there is a lack of information on the project’s requirements. The Fixed Price method works best when all the requirements are understood and well-documented. While there is still planning and requirements specification involved, the T&M model allows you to change the scope and the milestones on the go. Thus, the actual product budget might differ from the initial estimate provided by the team.The time and material model provides increased flexibility in terms of project requirements, scope and functionality.You have complete control over the budget and the timeframes and can change the scope and the priorities in order to stay on track. This model works well for both large and medium-sized projects while providing full control over the development process and budget. While the product is under development, the total cost o and scope are estimated only approximately. Predefined requirements will determine changes in the project. Important factors in this process are the time and effort required to implement the project.
How can you choose the business outsourcing model that best suits your project? Start from the first rule of outsourcing: understand what your actual needs are, then choose the right approach and implement it. Depending on the specifics of your project, you must decide what risks you’re willing to pay your outsourcing provider to take on and for which part of the project the supplier will be responsible.