22.06.2021

Billing models in IT – Fixed Price and Time & Material

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When outsourcing an IT company to create a project, it is worth determining how it will be billed already at the beginning of cooperation. Even if you have a specific budget for its implementation, the method of billing for the project may not be so obvious.

Contractors usually offer two models of IT settlements: Fixed Price or Time & Material. It is worth knowing what each option is characterized by and choose the one that suits you best. In this article, I will discuss both variants, hoping to help you make your decision.


Fixed Price

It is a model that involves setting a specific price for the implementation of the project at the very beginning of cooperation. Therefore, it obliges to stick to rigid arrangements made on the basis of a schedule and specifications.

When you know exactly for what purpose you are creating a product, you have defined key functionalities and you know that nothing in your project will change over the next months, this model is right for you.

By choosing this form of project settlement, you deprive it of the possibility of introducing changes. It is worth being aware of this, especially in times when the market and users' needs are changing very dynamically. As long as your project is small and does not require many months of development, this solution is beneficial for you.

You must be aware that the price given by the contractor may be overstated and therefore not very attractive. Where that stems from? From a very simple fact – the contractor must include in the price the margin of error in the project estimation. It is not always the case that a project goes according to schedule. There may be situations that will require additional working hours of developers, or it becomes necessary to add an additional feature. In the case of the Fixed Price model, these additional costs should be considered at the stage of providing the total price for the project.

If you do not have a person in your team who would be able to coordinate the scope of work of a programming company, it is worth considering Fixed Price’s option. Then the responsibility for the project lies with the team that makes the product. The Fixed Price model is often chosen in business situations in which the client has enough trust in the contractor that he is able to entrust him with the project and set a price in advance.

The Fixed Price model is for you if:

  •       You have a precise specification prepared and you want to stick to the schedule strictly
  •       Your project is small and does not require a lot of work time
  •       You want to know the price at the beginning of cooperation
  •       You cannot coordinate the workflow
  •       You trust the contractor of the project


Time & Material

This model gives much more flexibility, because the settlement is based on the hours actually worked by the development team. This time is estimated on the basis of their worksheets. You don’t have to stick to rigid frames then, as with the Fixed Price model. Therefore, it is possible to constantly monitor the works and introduce changes on an ongoing basis, depending on the needs. When you operate in a dynamic industry where the pace of change is fast, or if you know that your project will grow very quickly, then it is worth considering this billing model.

With this solution, you are not required to have the full specification and schedule. Of course, you will specify the most important information related to the project, but the time of operation may be flexible. If you decide to modify or add additional functions while creating the solution, it will not be a problem. It is connected with extending the time of working on the product, which may change the deadline for delivering the project.

Choosing the Time & Material model gives you the opportunity to start the project sooner, because you do not need to have all the requirements for the product precisely specified. Many aspects related to it are determined on an ongoing basis, as a response to current needs.

The contractor regularly presents the results of the work at individual stages. Such action requires the client to assign a person who will be responsible for the coordination of the entire process and contact with the programming company.

Settlement of works based on the Time & Material model is favorable from the price point of view. You don’t have to pay the entire amount for the project right away, even before it is even created. There is also no need to take into account additional costs in the event of complications, so you can realistically determine the actual cost of the project. 

The Time & Material model is for you if:

  •     You do not have a detailed specification and work schedule
  •     You want to start working on a project quickly
  •     You prefer flexibility in action
  •     You are able to coordinate the workflow or assign another person to do so
  • You prefer to pay for specific work results


Fixed Price or Time & Material – which billing model to choose?

Take both options calmly, consider each of them. Think about what you expect from the contractor and what you care about the most. What stage are you and your idea at? Specify the budget and idea, whether you want to know the price immediately and pay regardless of the end result, or you prefer to see the results you are paying for. Take your time to think about which billing models are right for you.

A lot depends also on the contractor, which billing model he prefers, whether it gives a choice or imposes a given option in advance. Or maybe it is possible to combine Fixed Price and Time & Material? Some software companies allow you to combine both models in one project.

The choice of the model on the basis of which the project will be billed is an important aspect. Unfortunately, many people are unaware of this. It is often the case that the contractor imposes a given model. The client agrees to it without even being aware that there are other options. In order to protect yourself from this, it is worth being aware of the fact that there is a choice. The more consciously you approach the topic, the easier it will be to avoid making a mistake.

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