Fixed Price vs. Time & Materials: The Right Contract Type for Your IT Project. A Miniguide

Are you looking to work with a software house? Learn the specifics of the most popular contract types: transparent and flexible Time & Materials vs. Fixed Price—a variant that works well in small IT projects with strictly defined requirements, budget, and deadline. We help you make an informed decision and choose a solution not only tailored to your needs and capabilities but above all the one that’s the most cost-effective.

After reading our miniguide, you will know:

  • How the Fixed Price and Time & Materials models work
  • What are the benefits and risks resulting from them
  • When it is best to use each variant

What Does “Fixed Price” Mean?

In the Fixed Price model, you know the total cost of the project before signing the contract. The price is usually set on the basis of predetermined requirements and the work schedule. Thanks to this, you can plan the course of all works step by step and calculate the amount of time needed to complete the project. 

In this model, you know exactly how much you will pay for the completed project and can include the specific amount in your calculations. If you have a small project, or part of a project, to implement with strictly defined expectations as to the features and appearance of the software, and the budget and deadline for its launch are fixed, then setting a “fixed price” may be a good idea.

Fixed Price—Pros and Cons

The advantage of Fixed Price is predictability because in this model you know the budget and scope of work in advance. Thanks to this, there is a limited risk that unforeseen changes will be required during the project implementation. You receive a finished product and save time that you would have to spend on participating in the team’s work.

Cons? Every responsible software house will present a price slightly exceeding the expected costs of the project. Why? The contractor must take into account a safety margin to avoid a reduction in product quality in the event of unforeseen complications and to ensure that a solution that meets the customer’s needs is provided. So the price, although known in advance, does not have to be the best for you.

Having to specify all design requirements at the very beginning may also be a disadvantage. To estimate the cost of the project before it starts, a meticulous specification is usually drawn up. Performing such a detailed analysis is time-consuming. In addition, the execution time may be affected by how efficiently you provide contractors with the necessary access or answers to follow-up questions.

It may also be that already during the implementation it will be necessary to introduce changes that were not included in the initial assumptions. Adding more features and changes means modifying the specification and, as a result, increasing the total cost. When it turns out that the price of the project significantly exceeds the assumed budget, it may be necessary to reduce the scope at the expense of significant changes. All this can unfortunately lead to a reduction in the final quality of the product or service.

Pros of Fixed Price:

  • Predictability—you know the total cost in advance
  • Easy management—you receive finished and complete product
  • Limited risk of unforeseen changes
  • Only the minimum commitment on the client’s part after the start of the project

Cons of Fixed Price:

  • Lack of flexibility
  • The need to provide the software house with exhaustive requirements
  • The time-consuming analysis required to be performed upfront by the software house
  • Extra costs generated by complications not included in the requirements or incorrect selection of the contract type

Time & Materials—What is it About?

In the Time & Materials model you pay only for the work actually performed and the resources used (e.g. the costs of the necessary licenses, expert consultations in the area of ​​software accessibility for people with disabilities, time devoted to training your team on the use of the newly created system, etc.). 

Time & Materials is most often used for demanding and complex projects where it is difficult to determine the exact size and scope of work. This model assumes cooperation based on an hourly or daily rate and incurred expenses of external services and tools. Final calculations made at the end of the contractual period are usually based on a time report.

Time & Materials—Pros and Cons

The main advantages of the Time & Materials model are flexibility and cost-effectiveness. During the implementation, the product being developed is systematically presented to you, thanks to which you can verify the progress of the software house’s work and make corrections to the project on an ongoing basis, without having to renegotiate the terms of the contract. Such action enables free control of the budget and efficient implementation of particular stages of the project, and thus—savings. 

Equally important, with swift approval of subsequent stages of the project, it can be completed ahead of the assumed finished date. Such a model will be more beneficial for you if you do not have specific project requirements or you anticipate that the initial assumptions may dynamically change during the development of the product.

Lower costs and the ability to make changes if necessary are the undoubted advantages of the Time & Materials model over Fixed Price. Can something go wrong with the Time & Materials model? Due to the greater freedom, this model is conducive to introducing too many changes, which may result in exceeding the deadline and budget expected at the beginning. It also requires involvement in the project’s execution, which can be time–consuming. In order for the Time & Materials model to be profitable, the participation of a competent person who will supervise the budget and the work of the software house is often needed.

Pros of Time & Materials:

  • Savings and costs transparency
  • The ability to monitor progress on an ongoing basis
  • Flexibility
  • Ability to react quickly

Cons of Time & Materials:

  • Time-consuming involvement on the client’s part
  • Supervision of a competent person over the work of the IT team on a daily basis
  • The risk of losing control over expenses and exceeding financial assumptions

What to Choose? Summary

The effectiveness of both models—Time & Materials and Fixed Price—depends on the nature of the project and the resources at your disposal. When you decide on a specific solution, take into account factors, such as business conditions, project specifics, internal resources of your company, and the conditions offered by a specific software house.

The Fixed Price model is worth using when your project has a deadline and a clearly defined end result. It will work well when you are able to work out a schedule and scope of work to be performed at the very beginning, and you cooperate with an experienced software house that is able to prepare a clear and fair estimation.

The Time & Materials model will work well when you are planning a non-standard, long-term project, which additionally does not have a clearly defined scope of work or completion date. Time & Materials is a good choice when you expect to introduce changes during the project and you care about a flexible approach and a quick start of the work, without lengthy arrangements and negotiations. In this case, it is worth having a competent person on your team who will communicate with the contractor on a regular basis.

Finally, the most important thing: sometimes you do not have to choose between the Time & Materials and Fixed Price models. You can try to combine both options: build the basic product in the Fixed Price model and then continue developing it using Time & Materials. 

Do you need help choosing a contract type? Call +48 22 120 17 00 and tell us about your project.