Selecting the right pricing contract for outsourcing app development is one of the many make-or-break decisions you make before jumping into development. Does the predictability of a fixed price mesh well with the nature of your project, or do you need the flexibility of a time and materials (T&M) approach to nail the right solution? While both options have their pros and cons, the final choice hinges on your specific project variables.
We've prepared a time and material vs fixed price comparison to help you choose the pricing option that makes the most sense for your project.
What is a fixed-price contract?
As the name implies, a fixed-price contract is an engagement where a client and a service provider agree on a fixed scope of work, deadlines, and payments. Although the fixed price agreement is known for upfront clarity on project costs, you don’t need to define the scope of fixed-price projects right off the bat. At Orangesoft, we work with you to identify your pain points and write a detailed project specification. Based on these specs, we’ll provide cost and time estimates.
Although the scope is predictable, it’s not entirely rigid. You can still add new features to the scope while developing an app. However, these additions require separate negotiation and payment and may only occur after the initial agreed-upon scope is completed.
How does a fixed-price contract work in practice?
Thorough groundwork is a crucial prerequisite for a fixed-fee contract, as it underpins a smooth development process and minimizes the risk of surprises down the road.
Step 1: Defining the scope
Under the fixed-price contract, your collaboration with the tech partner kicks off with a detailed requirement breakdown. The tech partner works with your team to define app features and functionalities and then jots down product specifications, visual elements and layout, acceptance criteria, and other product specifics.
Step 2: Project estimation and contract signing
Following the well-defined scope, the development company estimates the total cost and timeframe for completing the project. Once you agree on the scope, price, and timeline of the project, you sign a formal contract that clearly outlines all the deliverables, milestones, payment schedule, and change management process.
Step 3: Development and delivery
Guided by a structured development approach, the development team builds your application according to the defined scope. Fixed-price contracts do not allow for high-level changes, while minor tweaks are possible, provided they’re technically feasible.
Any changes to the scope are handled via a change request and priced separately. Once the app is ready, the development team delivers the final product to your team so you can estimate it according to the acceptance criteria.
What are the pros and cons of a fixed-price model?
A fixed price model is quite popular among companies due to its predictability. However, it’s not a silver bullet. Below are the pros and cons of a single-sum price agreement.
Pros of fixed price contracts
Fixed budget
With a lump sum contract, a client knows beforehand how much money it will take to build an app. The total cost of the project is established and locked into the contract and remains fixed throughout the development, allowing the client to budget with confidence.
Fixed deadlines
The project's scope is set in advance, ensuring the delivery data stays precise. This predictability allows companies to plan post-launch activities, such as marketing campaigns or team training, well in advance.
Little management effort
Although this pricing contract doesn’t imply an entirely hands-off approach, the client’s involvement in the project is kept to a minimum, thanks to a well-documented scope and vision. The development company is in charge of allocating resources and scheduling work while the client approves deliverables at key milestones.
Reduced risks
Thanks to cost clarity and well-defined project scope, this pricing model reduces the risks inherent to the development process, such as budget overruns. Also, this contract transfers a significant portion of the project's cost risk from the client to the development company.
Cons of fixed price contracts
Little room for flexibility
As previously mentioned, any changes out of scope require a contract modification. This approach is ill-suited for iterative development as it's hard to incorporate new features discovered during the development process.
Slow project launch
The customer and development team can spend a substantial amount of time planning out the product development roadmap in detail. This time-consuming process can be a potential drawback when it comes to short deadlines. At Orangesoft, we streamline this process through workshops and pre-built templates, but it may still take a while.
Less control
Fixed-price projects may come with a high-risk profile as you don’t have direct oversight of the development team's code or daily processes. With this model, the vendor is fully responsible for the team and project management, while you can check in with them at key milestones.
Higher project cost
To account for unforeseen technical challenges, development companies often include a buffer in their cost estimates for fixed-price projects. This buffer provides peace of mind for both parties but may translate into higher project costs compared to the time and materials approach.
Scope creep is another concern associated with the fixed-price contract, as all unexpected requirements are priced outside the original agreement.
When is it best to choose fixed-price software development?
The rule of thumb is to choose a fixed-price contract for straightforward and predictable projects with a well-defined scope. Use cases for this pricing contract also include:
- Small projects with basic features that don't exceed three months of duration
- MVPs with a limited budget that require basic features initially
- Projects with tight deadlines and budgets
- Projects with a set of predetermined features
What is a time and materials contract?
According to time and material contracts, clients are billed based on the time logged by the development team and materials used while developing their software projects. Unlike fixed-price projects, T&M contracts don’t have the final project cost set in stone, as it depends on the number of hours and resources poured into the project. This engagement form also allows you to scale development up and down as and when needed.
How does a time and material contract work in practice?
Unlike a fixed-fee agreement, a time and materials contract brings forth a collaborative approach to software development, focusing on adaptability.
Step 1: Initial project kickoff
This pricing model doesn’t require you to detail the project scope right out of the gate. That’s why, during the initial phase, your development team focuses on the project's core functionalities and goals, along with a general development roadmap. You establish the priorities for the project and align your project’s objectives with the development team.
Step 2: Estimation and breakdowns
Based on the core functionalities, the development team prepares an initial estimate that tallies up the time and resources required for the primary development phase. They often break this down into smaller, more manageable tasks like user stories or sprints. This initial estimate serves as a starting point, and you can make adjustments as the project moves forward.
Step 3: Iterative development based on feedback
T&M contracts typically precede an iterative development approach, in which the development team makes headway with a predefined set of features for each sprint. As a client, you’re closely engaged in the development process, providing feedback at the end of each sprint and prioritizing features for the next iteration.
Throughout each sprint, you’ll be billed based on the actual time spent by the development team and the resources used to build up the functionality.
What are the pros and cons of the T&M contract model?
Time and material contracts give you the freedom you need to successfully complete projects with a dynamic scope. However, to benefit from this flexibility, you need to approach your project with clear communication and cost awareness.
Pros of the T&M contract model
High flexibility
This pricing model is usually accompanied by iterative development, which allows the team to accommodate project changes as they occur. 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
Launching your product faster is crucial in today’s competitive business landscape. That’s why the T&M pricing model is particularly favored by startups in a time crunch. The planning stage is shorter than in a fixed-price project, as the project's specifications don't need to be as detailed.
You can easily adjust your vision later as you gather more insights about your end users and polish your product vision.
More control over the project
T&M contracts offer a more collaborative, flexible approach that puts the client in the driver’s seat. As a client, you are involved in all the development phases, including sprints, iterations, and meetings where you can discuss the progress and course-correct if needed.
Also, with this pricing model, you can control resource allocation and decide which features to focus on first.
Reduced risk
With phased development, early feedback, and close collaboration with the development team, you have fewer chances of getting a product that doesn’t resonate with your vision and real user needs. As the scope isn’t fixed upfront, you can adjust your development without derailing the project.
Cost transparency
Regular reports on time and resources spent keep you in the loop about the project's progress, allowing you to prevent cost overruns. Also, with T&M contracts, you can call the shots about the amount of time a team spends on a specific task and adjust the scope whenever it goes beyond your budget.
Cons of the T&M contract model
Uncertain budget
Unlike fixed-price contracts, the time and materials (T&M) model allows for mid-project adjustments that aren’t factored into the project budget beforehand. While this flexibility is beneficial for the product, it can also lead to unexpected costs.
Uncertain deadlines
T&M contracts allow clients to start a project without a clearly defined scope. However, this also means that unforeseen requirements can increase the lead time, extending the actual release date beyond the expected deadline.
Requires deeper involvement
Even though it seems like a big plus for some clients, for others, close involvement in the project can become a burden on top of their regular roles. Although the right project management approach can offset this drawback, T&M contracts still require significant time commitment from stakeholders.
When is it best to use a time and materials contract?
Time and materials contracts are a good mesh for projects where it's hard to pin down the final cost or the timeline of the project upfront. Examples of such projects include:
- Large-scale and long-term projects with flexible requirements
- Projects with an unclear scope
- Projects revolving around changing market needs
Fixed price vs. time and materials: head-to-head comparison
Each cooperation model has its obvious advantages and disadvantages. The flexible nature of the T&M model can cover all the unanticipated overages, while a fixed budget and deadline can get your product developed on schedule. To help you make the right call, let's compare both types of contracts head-to-head:
| Feature | Fixed-price contract | Time and materials contract |
|---|---|---|
| Scope | Requirements are detailed upfront | Scope is adjusted throughout the development based on feedback |
| Project budget and timeframe | Fixed | Flexible |
| Project launch | Slower due to extensive upfront planning and detailed project scoping | Potentially faster due to less upfront planning |
| Client involvement | Limited involvement in the project after the kickoff | Ongoing involvement in the project |
| Payment | Predefined total cost paid in installments or upon completion | Regular invoices based on actual time spent and resources used |
| Control | Full control over the budget, yet little oversight of the team and product being developed | More control over the team and the product, but budget can be less certain |
| Flexibility | Limited, minor tweaks are allowed | High, high-level changes are allowed |
| Deliverables | The team delivers according to the pre-agreed scope | Deliverables can evolve based on the feedback |
As you see, at the end of the day, an optimal pricing contract depends on your specific project needs and priorities. Take into account the criteria above to determine which approach brings the most value and cost-effectiveness for your software development project.
Summing up
Both cooperation models have their benefits and drawbacks, and each has its use cases. 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 experience working with both fixed-price and T&M models. If you need help with choosing the right pricing model or want to get an accurate estimate on your project, you can always reach out to our team.