Fixed Price vs Time and Materials: which software pricing contract is right for you?

The cost of development is always an important consideration when looking to hire a software development partner, and rightfully so. Such partnerships can be built on either fixed prices or contracts where the client is charged for costs of development. However, deciding on which one to opt for depends. Yet, there are no limitations to factors such as requirements, budget, quality of work and the deadline.

Read onto to find out whether your business needs fixed or time and materials pricing for its software development.

What is a fixed price contract?

Fixed Price contracts as the name implies are software contracts whose deliverables and prices are agreed before starting the work. Projects like that involve intense questioning and probing of the client’s ideas and requirements. Everything has to be clear to ensure the software house has a very clear idea of the end product. Wireframes can be extremely useful here as it will help visualise the end product. The software house then does some scoping inside itself to evaluate the technologies, designers, developers and other resources. There are many factors that must be met with clients expectations. Thereafter, client is presented with the scope of required work, deadline, fixed cost of the product and a plan for its development.

What advantages do you get from fixed price contracts?

1. Help with budget allocations – Having a fixed price for the deliverables can help clients with allocation of a set budget. Also, they don’t have to worry about it increasing. Any charges over the agreed amount must be notified of in advance and agreed to by both parties.

2. Little client involvement – Fixed price software contracts require very little involvement from the client. That’s because the deliverables are agreed by all parties well in advance. Such contracts are perfect for clients who have little technical knowledge. It’s also ideal for those who have little time or prefer a hands-off when working with their outsourcing partners.

3. Predictability – Clients that need to plan a budget for development costs benefit from fixed-price contracts. Due-to them being fixed and predictable. Such contracts give the client a better view of the development as it happens and makes reporting easy.

4. Fixed deadlines – Fixed price contracts provide clients with fixed deadlines that the software house will need to meet. Any overdue can have the software house incurring financial penalties.

What disadvantages do fixed contracts have?

1. Marked up prices – Fixed price contracts tend to be costly as software houses mark up their development costs to cover any development work that might be outside the scope of work agreed in the contract.

2. Rigid scope with no possibility of changes – Fixed price contracts make no room for adding new functionalities or any change in scope whatsoever. This is detrimental as the customer requirements today change rapidly, and might have the client receiving a useless product.

3. Long planning sessions – Agreeing on the scope of fixed-price contracts is a tedious affair as all requirements have to be planned well in advance. This takes an inordinate amount of time, pushing the development time further.

4. Quality assurance issues – Instances of software houses delivering products with substandard code and little testing to meet the stringent deadlines aren’t unheard of.

5. Miscommunication between teams – Misunderstood project requirements can have the developers performing lots of work that will end up being of no use. This risk of miscommunication grows proportionately to the cultural differences between the client and software house (yet, another reason why Mood Up prefers nearshoring).

What is a time and materials pricing contract?

As you might have guessed Time And Materials contracts charge for the actual work done (agile pricing). It’s a perfect contrast to the more rigid one-time payment required of in fixed-price contracts. Such software development is accomplished by scoping the project requirements with the client. This is being followed by accessing the required work and then dividing it into sprints (components). The client is then informed of the number of hours and materials required to build each sprint of the project. Such an approach to pricing software development lets the client be in charge of the development. It also gives him a birds-eye view of development as it happens.

What are the advantages of a time and materials contract?

1. Better control of costs – The ability to pay only for the work done allows clients to add and/or modify the requirements at any time. Such an approach to software development is best for clients who prefer to see what they are paying for.

2. More flexibility to change requirements – The ability to pay only for the work done allows clients to add and/or modify the requirements from their software product, at any time of their choosing. This is important as the market and customer requirements might change, thereby requiring new/modified functionalities.

3. Less time scoping, more time developing – Time and Materials based software products work towards building a minimum viable product (MVP) first. And just then making iterative improvements to it. Development work, therefore, can start immediately without the need to spend days pouring over requirements as with fixed contracts.

4. Transparency throughout the project – The client is informed of the work hours and materials that is required for development, along with the hourly rates before every sprint. Such transparency allows for better cooperation between the development house and the client.

5. Ability to terminate the partnership at any given time – Time and materials pricing contracts allow clients to pull out of contracts at a time of their choosing as the charges are by sprints. This pricing approach tends to be useful if the quality of work from the developers do not match client expectations.

What are the disadvantages of a time and materials contract?

1. Requires more client involvement – Time and materials software contracts require clients to play a lead role in managing the development of the product. This approach can have the client creating, managing the product backlog, attending weekly reviews and product demos.

2. Costs can escalate with more functionalities – The ability to add/modify functionalities can have your product being more costly than it was budgeted for. However this shouldn’t pose an issue as the client can always terminate a contract should the cost become too excessive.

3. Uncertain deadlines due to changing requirements – Any changes in project requirements can push the deadline back and delay the release of your product to the market.

So which one should you choose?

Both software pricing approaches have their pros and cons. We recommend our clients to opt for one that suits their development and business needs in the best way.

Fixed price contracts are perfect when the required software is of limited functionalities, with a very strict budget. Also, the purpose that’ve been set for the product will not change anytime. This approach to development should take place if the product is akin to a MVP and has a strict delivery deadline.

We at Mood Up Team prefer the time and materials approach to software development, as it matches our agile design and development principles. Such an approach we’ve found is ideal. It’s impossible for us and the client to have a concrete idea of the end product before starting its development. The flexibility offered by this pricing approach allows our clients to add new functionalities. Also it ensure the end product is relevant and not redundant as with a product delivered at the end of one long fixed-price development cycle