client guides · Clock5 min · 02 Dec 2021

Fixed Price vs. Time and Materials Contract: Which One to Choose for Your Project?

Alex Melchenko

Alex Melchenko

Chief Operational Officer

time and material vs fixed price
Illustration by Amir Kerr

Sometimes, buying a ready-made app solution isn’t enough to solve your business needs. Said app may be missing needed features or fail to integrate with existing software. In addition to these common issues with ready-made apps, there are a lot of reasons why you should opt to build a custom application.

When developing an application, companies have two options: use their own forces to set up an in-house department or outsource app development.

When opting to use an app development company, you will sign a contract and a work order. In terms of pricing, there are several pricing models that development agencies use. 

 At Orangesoft, we offer two pricing models to choose from:

  • Fixed price model
  • Time and materials model

The above approaches are the two most widespread pricing models for software development today, and they differ vastly. Each of them has its pros and cons, and we’ve prepared this article to help you make the right choice for your needs. 

What Is a Fixed Price Contract?

As it can be inferred from its name, a fixed price contract is a type of contract where a client and a vendor agree on a fixed scope of work, deadlines, and payments. With this model, you don’t have to be a software development professional to set the project scope. At Orangesoft, we can help you identify your pain points and write a detailed project specification, and then, we develop cost and time estimates based on those specifications.

Though the scope of work is fixed, new features can still be added to the scope while developing an app. But the realization of the added features may only occur after the initial agreed-upon scope is completed and would require separate negotiation and payment. 

Below are the pros and cons of a fixed price agreement:

Pros of the Fixed Price Contract Model

Fixed Budget

With a fixed price model, a client knows beforehand how much money it will take to build an app. The price is written into the contract and remains fixed. 

Fixed Deadlines

A client gets a ready app on the estimated date since the app’s specifications are planned beforehand. Further, knowing the deadline means the client can plan post-launch activities in advance. 

Little Management Efforts

All the project features are well-documented so that they can be quickly passed down to the development team without additional involvement from the customer.

Predictable Outcomes

The project result is negotiated and put into the scope upfront, so clients know what to expect.

Cons of the Fixed Price Contract Model

Little Room for Flexibility

As previously mentioned, if the project requirements change during the development process, the client would be additionally charged.

Slow Project Launch

The customer and development team can spend a substantial amount of time planning out the product development roadmap in detail. This process can be a potential drawback when it comes to short deadlines as it can be time-consuming. 

Less Control

As a client, you won’t be able to assess the quality of the code, team members, and skill level of the developers assigned for the project. When using this model, the vendor is fully responsible for team and project management. Nevertheless, it doesn’t mean that you’ll be in the dark about the workflow.

Higher Project Cost

Since a vendor usually includes risks while estimating the project’s price, the final project cost may be higher when compared to the time and materials approach. 

When Is it Best to Use a Fixed Price Contract?

  • Small projects with basic features that don’t exceed three months of duration
  • MVPs with a limited budget that requires basic features initially (To learn more about MVPs, read here)
  • Projects with tight deadlines and budgets 
  • Projects with a set of predetermined features 

Read also: 9 Tips on How to Choose the Best App Development Company

What Is a Time and Materials Contract?

A time and materials (T&M) contract differs significantly from the fixed price approach, where you know a fixed sum before starting your development project. According to a T&M contract, you pay the vendor for work hours, materials, and equipment used while developing your software project. In addition, the T&M model is highly flexible, allowing for changes and additional features.

The following approach is beneficial when it’s difficult to estimate how much the project will cost or how long development will take to complete. When using this model, there are no set deadlines or fixed prices for the project’s development. 

Pros of the T&M Contract Model

High Flexibility

Due to the usage of the Agile method, it is possible to make instant changes to a project when they are needed. Here, the vendor can take advantage of a product approach to react quickly to users’ feedback and market tendencies (e.g., reprioritizing tasks in the development process, adding or removing features, etc.).

Fast Project Launch

The planning stage is shorter than a fixed price project as the project’s specifications don’t need to be as detailed, meaning that you can start the work on app development earlier.

More Control over the Project

You’ll be involved in all the development phases, including sprints, iterations, and meetings where you can discuss the progress and decide the next steps. 

Cost-Efficiency

The T&M model does not charge a flat rate. A customer pays a higher rate for senior software developers and a lower for junior ones. Moreover, you can control how much time a team spends on a specific task.  

Read also: How Much Does it Cost to Build an App

Cons of the T&M Contract Model

Uncertain Budget

There are increased chances that the project will cost more than expected since changes are inevitable when building a software product. 

Uncertain Deadlines

T&M contracts allow clients to start a project without a fixed scope. However, this also means that requirements will be added during development. Thus, the actual release date can extend beyond the expected deadline. 

Requires Deeper Involvement

Even though it seems like a big plus for some, many clients find daily meetings, planning, and reports too time-consuming. 

When Is it Best to Use a Time and Materials Contract?

  • Large-scale and long-term projects with flexible requirements 
  • Projects with an unclear scope 

Read also: How to Outsource Mobile App Development?

Fixed Price vs. Time and Materials - Which Model Should You Choose?

Each cooperation model has its obvious advantages and disadvantages; for example, the flexible nature of the T&M model can cover all the unanticipated overages, but a fixed price budget and deadline can get your product developed on schedule. To help you answer this question, let’s compare these two contract models directly:

 

Pros

Cons

Fixed Price
  • Fixed budget
  • Fixed deadlines
  • Little management efforts
  • Predictable outcomes
  • Little room for flexibility
  • Slow project launch
  • Less control
  • Higher project cost
Time and Materials
  • High flexibility
  • Fast project launch
  • More control over the project
  • Cost-efficiency
  • Uncertain budget
  • Uncertain deadlines
  • Requires deeper involvement

Summing Up

Both cooperation models have their benefits and drawbacks, and each works best for various software development projects. To choose a suitable pricing model, you need to understand your project scope, time, budget, and the level of involvement you want and can afford.

We at Orangesoft have the experience of working with both fixed price and time and materials contract models. That’s why we consider ourselves competent enough to compare the two pricing models to provide you with our expert option on which is the right model for your project’s unique requirements. 

Generally, we tend to work with the T&M model. However, if a project requires a different approach, the fixed price contract is viable, too. 

If you want to verify your decision with an outsourced development agency, you can always reach out to our team.

What is a fixed price contract in software development?

A fixed price contract implies an agreement between a client and a vendor on a fixed scope of work, deadlines, and payments. It's a great option for projects with a set of predetermined features and fixed deadlines.

What is a T&M model?

In a time and materials (T&M) contract,  you pay for actual hours spent on development and for the completed amount of work. It's ideal for projects with an unclear scope. Unlike a fixed price contract, the T&M model is highly flexible, allowing for changes and additional features.

What is the difference between fixed price and T&M?

In a Time & Material model, you pay for the actual time the team spent on developing your product, together with the cost of all the materials and equipment used in the process. While in a Fixed Price model, you pay the provider a fixed sum for the concrete project scope, no matter how many hours the team actually spends working on the product and the other costs the provider has in the process.

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