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Home Blog IT Outsourcing The cost of software development: Time and Materials vs Fixed Price

The cost of software development: Time and Materials vs Fixed Price

When you decide to bring your product idea to life, questions pop out everywhere:

  • Which company to choose?
  • How much time will the development process take?
  • What is the cost of software development?
  • Which type of billing method should I choose?

The last question may be particularly tricky.

In the software development industry, there are two main pricing models: Time and Materials and Fixed Price. Both of them have their respective pros and cons so choosing the best fit for your project may be difficult.

However, worry not, I won’t leave you in the lurch! To help you decide, I listed all the elements distinctive for both billing methods. I will guide you through the advantages and disadvantages to help you make the best possible choice.

Time and Materials

Time and Materials method refers to the billing in which the employer pays the contractor based upon the time spent to perform the work and for materials used during the development process. Time and Materials method is generally used in projects in which it may be difficult to accurately estimate the size of the project or when it is expected that the project requirements would most likely change.

Advantages

  • Easy project start
  • Responsive to market changes
  • Transparency

By choosing the Time and Materials method, you’re up for an easy start. You don’t need to have a complicated and long-term plan. Of course, you must present your idea to the development team and choose the most important features, but you don’t have to provide them with all the details. The development team can start working right after being introduced to the scope. As easy as that.

With Time and Materials, you can also react quickly to any market changes. Even if the feature that you wanted to implement becomes obsolete due to new trends, it can be easily substituted by the other, more desirable one. This method gives you and your development team a lot of flexibility.

Even if you’re not a control freak, you will probably want to know what happens during the development process. You can get that choosing Time and Material. The development team will provide you with as much information about the project as you want. Depending on your preference, you can plan meetings or expect product demos to keep track of the progress.

Disadvantages

  • Low budgeting control
  • Uncertain deadlines
  • Involvement needed

Establishing just a general scope of the project can be a benefit. However, when it is not defined in detail, it’s hard to estimate the exact final cost of software development product. Of course, you can try to establish an approximate amount of money you will have to spend, but it’s impossible to predict all the circumstances.

As I previously mentioned, by choosing Time and Materials, you’re free to implement any improvements related to market changes. However, at the price of fixed deadlines. As your product and the scope of the project can change according to the market needs, it’s difficult to define an exact release date. However, it doesn’t mean that you have no control over the time at all. For this kind of cooperation, it’s important to set milestones.

Do you want to commit to the project and spent a lot of your time supporting the team with your industry knowledge? Great, then it’s not an issue for you. However, if you can’t devote a lot of your time and attention to the project due to other responsibilities, it may cause delays. Choosing Time and Materials, you must be able to respond regularly and make numerous decisions.

Fixed Price

In the Fixed Price model, the development process is adjusted to the estimated cost and time based on the project details and thorough planning. All the details and requirements, as well as the budget and the deadline, are fixed here. The well-articulated specifications allow you to get exactly what you need, and the deadlines you set in advance ensure that the project is delivered on time.

Advantages

  • Low financial risk
  • Fixed deadline
  • Little involvement

After you and your team agree on the cost of the project development in the contract, the price is set in stone. By choosing Fixed Price, you will know exactly how much you’ll pay. What’s important, the software company cannot overcharge you without notice. With this billing model, the risk of overspending is almost non-existent.

Having a final scope and detailed plan, it’s easier for the development team to estimate the timeline for the project and predict how much time they will need. Having all the important details, they can create a clear plan and set definite deadlines.

Also, as you have already established the project details, you can feel free to hand over project management responsibilities to the development team. There’s no need for continuous supervision so you can minimise your participation and focus on other duties.

Disadvantages

  • Long planning phase
  • Inflexible process
  • Miscommunication risks

If you need to deliver your product as soon as possible, choosing this billing method can be a big mistake. Planning features in thorough detail and defining scope can take a lot of time. If you find yourself in a time crunch to release your product, plump for a different method.

Once you sign the contract, you can’t change or add features. Unfortunately, if there are any changes in the market and some of the features become obsolete, or a new feature is needed, there’s no way to make these adjustments last minute. You can try negotiating to add new features, but it will result in the necessity to go through the planning process again. This can cause a serious delay in the delivery of the product.

To work well in a fixed price model, you must establish clear and straightforward communication. You must make sure that all the details or the project specifications are clear and understandable. If you fail to deliver all the necessary information, you can end up receiving something disappointing.

Uncovering the software development cost

When should you choose Time and Materials or Fixed Price

When choosing between these two billing methods, make sure to thoroughly assess the needs and requirements for the project, as well as consider the specific nature of your company. A pricing method that worked well for a similar organization may not necessarily be the best choice for your business.

Considering the foregoing Time and Materials and Fixed Price model comparison, you should weigh all the strengths and weaknesses of each billing method. You should also assess which one of them can fit in your project better.

Hopefully, the comparison will help you better understand what’s behind the cost of software development.

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In IT for 20+ years in system design & development & project management, analyzing business processes & requirements, transforming them into solid software solutions in ERP (finance, order management, purchasing & inventory), covering both implementations & customizations. Now Member of the Board of all companies in the TenderHut Group.