When it comes to outsourcing software projects, two models mostly come the first place- fixed cost and time & material. Both models are widely used by businesses for engaging with IT companies. However, many times, business people are often confused in choosing and differentiating between fixed price and time & material projects.
And this question matters a lot since it determines how your valuable resources will be used to complete your project. If you need help understanding these engagement models, here in this article, we will explain the difference between fixed price and time & material models and give you an overview of each so you can make the right selection as per your business requirements.
What is a Fixed Price Project?
As the name suggests, the fixed bid project is an engagement or agreement contract between the service provider and the client in which the cost of the project is already fixed. This contract model involves stable requirements and a predictive process. In the fixed bid project, everything is defined already and the entire development process goes as per the pre-defined or already-mentioned guidelines.
This method allows stakeholders to take proactive measures at the initial stage and monitor the entire workflow. Waterfall and iterative development methodology use fixed-cost models in software development projects.
What is a Time & Material project?
In the time & material contract model, you are charged based on the actual efforts which have been spent developing software or application, regardless of the development stage. This model doesn’t involve fixed costs. But, instead, it charges based on hourly/weekly/monthly for defined figures of resources.
It allows project owners to pay for only their spending and save unrequired costs. Time and material contract is compatible with all application development methodologies. However, rapid and agile methodology mostly utilizes time & material, engagement models.
Understanding The Difference Between Fixed Price and Time & Material Projects
Fixed price and time & material both are different contract agreements. They are mainly used in IT fields, software, web, and mobile app development industries. Fixed and time & material different in various aspects as follows
1. Need for Pre-Defined Project Requirments
The fixed price agreement model needs a pre-defined list of project requirements. It asks for detailed information about the project in all respect. For instance,
- What are the features?
- How many resources would be used?
- What is the fixed cost?
- How much timeframe is allotted for the project completion?
On the contrary, the time & material agreement model doesn’t need any pre-defined project details. It allows stakeholders to define project details after the start of the project. This model gives flexibility to project owners to determine their requirements later in the process.
2. Cost Estimation
In a fixed-price contract, cost estimation is clear at the initial stage of development. Price is fixed already since everything is defined before partnering officially. Therefore, this model gives a very clear cost estimation idea to business owners who run on a limited budget and can’t afford fluctuations in their budget.
Whereas, time and material contract agreement doesn’t have any fixed cost estimation. Its pricing is determined based on the efforts and actual resources used in the project. Cost estimation is time and the material model is complex due to its evolving and progressive development workflow.
3. Development Methodology
The fixed price model is highly suitable for waterfall development methodology. It is because the fixed price model comes up with pre-defined and already-fixed cost estimation which makes it suitable to be implemented in waterfall methodology. In the waterfall model, there is no scope for changes or very less chance for iteration.
The time & material model involves an evolutionary development approach. It provides a wider scope for making changes to the project frequently. Resources and timelines could be adjusted as per the revised course. Therefore, time and material models are not suitable for the waterfall but for rapid and agile development methodologies.
4. Project Timeline
The fixed cost model has a fixed timeline. Project owners can set their deadlines or certain timeline for the delivery of the project. This model compels IT or mobile app development companies to deliver the project on time without making any changes to it.
Time & material contracts also have defined timelines. However, in certain cases, the timeline can also vary depending on the number of changes or iterations made. The timeline could be fixed when the delivery of the project doesn’t require any modifications to the requirements.
5. Scope for Changes During the Development Phase
The fixed price agreement model doesn’t grant scope for changes or iteration. Project owners have to initially define their all requirements including cost, timeline, number of resources, features, methodology, etc. If there is a request for changes during the development phase, it will affect the entire project scope.
Time & material is known for providing great flexibility for making frequent changes regardless of the development stage. It allows project stakeholders to modify their requirements and adjust their needs accordingly.
So, you now have got a good understanding of fixed price and time & material contract models. Both models have their own advantages and disadvantages due to their distinctive properties. Therefore, based on your specific project requirements and business goals you should wisely choose the contract model.
When You Should Choose Fixed Price Contract Model?
- The project is small in size.
- The scope of the project is very clear.
- There will be no need for any changes in the future.
- The budget is limited.
When You Should Choose Time & Material Project?
- The project is large in size and evolutionary in nature.
- The scope or requirements of the project are not very clear in the beginning.
- You only want to hire app developers or resources for a certain timeline.
Fixed prices and time & material are useful contract models in the software and mobile app development industry. They both come with their own advantages and disadvantages. For business owners that want to outsource their software projects to hire resources, these contract models allow them to achieve their project goals efficiently. However, since every model is suitable as per development methodology. Hence, make sure you choose the right model as per your project requirements and server provider development methodology.
Guest article written by: Ishan Gupta is the CEO and Co-founder of RipenApps, a leading web, and mobile app development company specializing in Android and iOS app development. Deploying feature-loaded mobile & web app solutions to SMBs globally transforms business all around.