When outsourcing projects or insourcing tasks, organizations face a very crucial question about billing. Working with outsourced development team means that there are a few elementals that need to be sorted out from the beginning. It is because each project is different in its regard and comes up with its own set of requirements.
When a customer signs a deal with a software development company, they sign a billing agreement. The pricing model used depends mainly on project requirements. Two popular billing models are — Fixed-price Contract and Time and Material Contract. Selecting the right contract agreement is a vital step when outsourcing software development. Consequences of a wrong choice may yield unexpected outcomes.
Each type of contract has its pros and cons; hence, choosing any one of them may be a complicated task. The option that is well suited for one project may not be the ideal for another one. This article emphasizes on the advantages and disadvantages of these pricing models and explains which is better in what condition.
Fixed Price Contract
The fixed-price agreement is a type of contract where the service provider is accountable for completion of the project within the agreed sum in the contract.
In a Fixed Price model, the total budget on the project is set before development starts and remains unchanged. Plus, the exact deadline must be approved before the development starts. The contractor will bear the risks for late execution of works.
It is a practical choice in those cases, where requirements, specifications, and rates are highly predictable. The client should be able to lay down his clear vision of the project with the contractor to ensure appropriate final results.
When to use a fixed price contract:
- Clear requirements and deadlines
- Limited or fixed budget
- Limited project scope
Fixed Price advantages
- Usually requires clear deadlines and figures to be set to the budget. Planning expenses 1 to 3 months provide accurate statistics.
- Regular project management communication with the contractor ensures scope compliance and eliminates the possibility of surprises.
- Payments to the service provider count on the percentage of work performed. There is little involvement in such workflows since expectations are transparent and preset.
Time and Material Contract
Time and material (T&M) contract is the type of contract where the contractor is charged for the number of hours spent on a specific project, plus costs of materials.
Time and material contracts are much different from Fixed-Price because they involve billing clients for what they get. A time and material contract charges clients based on an hourly rate for all labor, along with the costs of materials. This type of arrangement might present some risk to the budget, but factors such as flexibility and opportunity to adjust requirements, shift directions and replace features prove to be very beneficial nonetheless.
In this model, the customer has a more significant role in the development of the software solution and bears all risks related to the project. The length of responsibilities that the client carries through the whole development process with time & materials is much higher than with fixed-price projects.
When to use T&M price contract:
- Long-term projects
- Full project scope not established
- Flexibility to modify the range with varying requirements
Time and Material advantages
- T&M contracts allow businesses to modify the scope of work, revise materials or designs, shift the focus or change features according to project requirements.
- There can be an established general goal that can be achieved, however knowing how it’ll be achieved is not so important beforehand.
- Opting for T&M contract process helps to save time and start projects immediately.