Billing models - Fixed Price and Time and Material
Story by Alex Augustyniak
5 min read
Are you planning your project, but still haven't decided which billing model to choose? In this article, you will learn the difference between Time and Material and Fixed Price models. Don't leave your project's success to chance - let us help you choose the billing model that best suits your needs.
Project pricing gives a lot of managers sleepless nights. They want to know in advance how big a portion of the budget they need for the work of an external IT team. On the other hand, they want to maintain flexibility and the ability to change arrangements during the implementation process.
It all boils down to two models: Fixed Price and Time and Material. These English names indicate two different approaches to billing for work. Both are commonly used but are rather case-specific. First of all, let's start with the definitions.
In this model, the price of project completion is predetermined. It is the product of the client's expectations, the work schedule, and the resources required to complete the task. So it may seem like an ideal scenario where the client can rest assured. After all, he/she knows how much to pay. Unfortunately, this is not always the case.
The fixed-price model will work especially well for smaller projects with tight deadlines. Here, the client's expectations are usually clearly defined from the scratch. Both parties agree on what is to be done and on a specific deadline. Everything runs smoothly and painlessly (at least in theory).
You can compare such a model to buying a finished product. The customer makes an appointment for a specific IT service, for which he/she pays a predetermined amount.
However, it is worse in the case of larger projects spreading within a wider time frame. This is because the price set at the beginning is based on initial assumptions and the necessary detailed specifications. But what if the concept of the project shifts or the client wants to add some functionality? Unfortunately, such circumstances involve renegotiation of the contract and incurring additional costs.
Time and Material
The second model discussed is much more flexible. The client pays for the work done by the development team and the time spent on it. Here, the implementation is usually split into stages, where the customer can inspect the status of the project and possibly make decisions on changes.
This solution avoids defining all the necessary requirements of the project at the very beginning. Instead of working on a complete and closed specification, it is enough to delineate key functionalities. This significantly accelerates the moment the project can be kicked off, and consequently curbs the time for its completion.
We know from experience that many decisions are made as early as during the construction of an application or service. By opting for the time and material method, we can introduce them at implementation.
Although it may seem that this model is less secure for the client, as a matter of fact, it offers the best solution from the final pricing perspective. In fact, in the end, we pay only for the work completed. In a billing model with a predetermined price, the so-called contractual risk is usually included in the contractual amount. The company adds a few or even several percent of inventory, which simply makes the whole endeavor more expensive.
Which billing model to choose?
Now that we learned what the two models are, it's time to answer the fundamental question – which one to choose? In most cases, we advise the time and material option. Why? Because it offers much more possibilities.
We have already mentioned the necessary project specifications when billing at a fixed price. Let's face it, hardly anyone can predict all factors in advance. Even the best-planned project requires minor tweaks and the introduction of new extensions during implementation. Sometimes entire concepts change, and instead of plunging into yet another price negotiation and drawing specifications, you can simply line up a new work schedule and move forward.
Below is a summary of the key aspects you should consider when choosing a billing model for your IT team's work.
The good news is that you don't have to decide on a single model. Many clients choose to combine both. In such a hybrid scenario, the basic functionality of a new digital platform or application can be billed on a fixed-price basis, and you can base the development phase of the project on the time-and-material method. Hence you benefit from the best features of both methods.