hero image of blog post - T&M vs. Fixed Price or maybe Mix model? Which billing model to choose for cooperation with a software house?
Authors
Stanislav Naborshchikov
Stanislav Naborshchikov

Channel Marketing Manager

T&M vs. Fixed Price or maybe Mix model? Which billing model to choose for cooperation with a software house?

When it comes to the development and support of information systems, many companies prefer to cooperate with external partners. This allows you to save on maintaining your own staff of IT specialists, simplifies cost control, ensures their predictability, makes it possible to free up resources for the main business lines, brings new ideas and technologies to it.

The key point in such cooperation, both for the customer and for the developer, is the cost of IT outsourcing. There are several price models of work, and each of them has pros and cons. Consider the main ones - Time & Material and Fixed Price.

The essence of the Time & Material price model

The model assumes hourly payment for the work of attracted specialists. The customer pays for the result based on labor costs. The estimate of the scope of work and the timing of the project is made only approximately. At T&M, changes are often made, and the main thing is the result and quality, not the price and timing.

Main Features of T&M:

  • Interim deadlines – the work is divided into stages (usually 2-4 weeks), goals and objectives are set, and at the end of the period, a report on the work done is compiled.

  • Payment for labor costs – it is made taking into account the hourly rates of employees and labor costs.

Advantages and disadvantages of the Time & Material price model

From the customer's point of view

Advantages:

  • Ease of interaction. The customer communicates with the team through the project manager, who then delegates authority within the team.

  • High response speed. If there is a need, priorities, and plans change quickly, it is enough to inform the project manager about it.

  • Selection of team members. The client has the right to determine the number and qualifications of project participants.

  • Transparency of work. 24/7 feedback and monitoring of interim results make it possible to keep abreast of events and monitor the project.

  • The simplicity of financial planning. Transparency of work simplifies the formation of a budget for individual stages, with T&M savings of up to 10-30% of the budget are possible.

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Disadvantages:

  • Lack of an accurate budget. The main disadvantage of T&M is that it is unclear how much time and money it may take to develop. These are financial risks for the customer.

  • Constant interaction. 24/7 feedback can be called a disadvantage in terms of spending time communicating with the developer, but this has a positive effect on the results and quality of work.

  • The risk of hiring an unscrupulous outsourcer. At T&M, there may be an overestimation of the volume of labor costs. It is important to choose the performer carefully.

From the contractor's point of view

Advantages:

  • Full commitment to the project. The team is focused on completing tasks and meeting intermediate deadlines, not distracted and not sprayed.

  • Payment based on the results of work. Remuneration is based on real labor costs, it motivates.

  • Low risks. When the work is divided into stages, it is easier to estimate the volumes and determine the budget.

Disadvantages:

  • No guarantees. If the customer suddenly decides to close the development or runs out of budget funds, the team will be out of work.

  • Difficulties of interaction with the customer. No one is immune from misunderstandings regarding both the financial side of the issue and other working issues.

  • Changing requirements. T&M involves adjustments in the course of work, and it can be quite difficult to adapt to constantly changing requirements.

The essence of the Fixed Price price model

The Fixed Price model implies an assessment of all planned works and the time required for their implementation, in accordance with the client's terms of reference. That is, even before the start of the project, the timing and price are precisely determined. This is a kind of guarantee for the customer that the project will be completed by the designated date, and for the agreed price. If in the course of work, it becomes clear that more tasks need to be solved than planned, the outsourcer agrees to revise the budget with the customer, but each additional analysis takes time and has to be scheduled in accordance with the approved timeline of the project.

Main Features of Fixed Price:

  • the deadline for development is known;

  • the budget for the project is determined in advance.

Advantages and disadvantages of the Fixed Price model

From the customer's point of view

Advantages:

  • Financial guarantees. Even before the start of work, it is clear how many resources will be required for the implementation of the project, there is the confidence that no additional payments will follow.

  • Exact deadlines. Since the completion date of the project is negotiated, there is an understanding of when everything will be ready, planning for further work is simplified.

  • Communicate with the developer as needed. The exact specification eliminates the need to stay in touch all the time, saves time on communication.

  • Minimum risks. A detailed technical specification reduces the risk of getting low-quality work to zero.

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Disadvantages:

  • Preparation of the most accurate specification. To determine the price and timing, it is necessary to exclude all uncertainties in advance, describe in detail the goals of the project, the functionality of the application, design, architecture, etc.

  • Possible overpayment. The Fixed Price pricing model often forces outsourcing companies to inflate prices for insurance in order to cover their risks if there is a need to solve additional tasks.

  • The difficulty of making changes. Any adjustments should be carefully described and planned to take into account the schedule and workload of developers, and the documentation should be updated.

From the contractor's point of view

Advantages:

  • Availability of detailed specifications. When it is clear exactly what the customer wants, it is easier to assess their strength, plan the work.

  • Understanding the scope of work and deadlines. Exact volumes give a sense of certainty, and the need to meet the deadline keeps you in good shape and motivates.

Disadvantages:

  • Insufficiently precise specification. Calculating the amount of work and time required to implement each stage of product creation is a very difficult task, and if there are inaccuracies in the SOW, the risk of not taking into account important points increases significantly.

  • Pressure. Tight price and time frames do not allow maneuvering, choosing the most effective solutions, the main task becomes to fit into the criteria.

  • The risk of additional work. The developer company plans to start a new one after the end of the current project, so the appearance of even a small block of additional work leads to difficulties associated with the need to shift deadlines.

  • Financial risks. The developer has to take into account possible changes and additional time for their coordination in the price of work, otherwise, he will have to pay for it out of his own pocket.

The essence of the MIX model

If it’s hard for you to choose - you don’t really have to. Sometimes it happens that the best form for your company is a mixed model. The mixed model combines the FP and T&M models in such a way that clearly defined requirements are implemented based on the FP model, and requirements that were unknown at the start of the project or that arise at later stages of the project are implemented based on the T&M price model.

The mixed model allows both sides to mitigate risks and to provide greater transparency of costs.

Conclusion

The T&M model is optimal when it comes to software testing, performing individual blocks of work, creating a medium-term project from scratch without an initial specification, and with the need to adapt to the needs of the client and market requirements, large projects with adjustments of work and specifications during development.

T&M is distinguished by the flexibility of the workflow and transparency of communications. There is no such pressure on developers as with Fixed Price, which allows you to look for optimal solutions, and focuses on the best end result.

Referring to the Fixed Price model is justified when there is an accurate idea of what exactly and how exactly should be done. For projects that do not have a detailed TOR, this payment method will be an unsuccessful solution.

A Mix model works best for performing a design phase of the product in a T&M model because of its flexibility and then changing the development process to the Fixed Price model. The most valuable reason for choosing a Mix model is freedom in combining billing models depending on the type of your product, its specifications, and the stage of development. 

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Matt Sadowski / CEO of Mobile Reality
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