Fixed Cost vs. Time and Materials. What is the Difference?

5864 Updated 09.06.2022
Vasyl Polych

Founder & CEO at Northell

5/5

Table of contents

What the company should choose: fixed cost vs. time and materials? It can be difficult to work with a team of developers and designers, so it is important to start by choosing the right model for working together. Each of the models has its pros and cons, so focus on the model that will be most suitable for both parties.

We always advise our clients to select a cooperation model when developing a new product responsibly. To assist you in making your decision, we have created an article that will assist you in answering the following questions:

  • When do you need a fixed cost model, and when is the T&M model better?
  • How do these models differ?
  • Which businesses might benefit from this or that model?
  • What sorts of services are this or that model appropriate for?

What is a Fixed Cost?

This type of collaboration requires paying a flat cost per hour to perform the task. Before signing a contract, you should have a well-planned project with a budget.

Keep in mind that the job analysis and estimate will be determined by the project’s goals and demands. As a result, a technical job that the development team can evaluate is critical.

Here are some of the major advantages of the Fixed-Price model highlighted in our fixed cost vs. time and materials comparison:

  • Set frames for the project. If the developers know the exact information about the project, they can easily calculate a detailed work plan and time frame for the project.
  • Predictable outcomes and lower dangers. Before signing the contract, it is critical to agree on all stages of the project, as well as the specifics of the technology and development control. This will help you save money on project control approaches.
  • An accurate understanding of how much will need to be spent on development. If you have a clear idea of ​​the final product, it will be easier to calculate the cost of technology, timing, and other project resources.

And here are some disadvantages of the Fixed-Price model highlighted in our fixed cost vs. time and materials comparison:

  • Improvements are possible. Such situations can occur because of errors, inaccuracies, or obsolescence, so the company will need to allocate additional funds for improvements. Be sure to show the possibility of revision in the supplementary agreement.
  • Misunderstandings are possible. It is possible that in work, misunderstandings may arise between the client and the development team. And if they are not resolved, the company will receive a product that does not meet its expectations.
  • Long planning is feasible. It is necessary to prepare an exact technical task to get an accurate development plan, develop a design, evaluate and agree on the first and second, and only then will it be possible to start development.
  • Market changes. Always remember that initially the terms of reference are set based on the state of the market. But at the end of the project development, the market situation may differ from expectations, so the software will need to be improved.

When Do You Need a Fixed Cost?

 

This concept is appropriate for businesses with modest initiatives, limited finances, and opportunities. Furthermore, the Fixed-Price model is appropriate for public sector organizations or those in need of an MVP. These projects should have certain specifications. Otherwise, the project’s needs will not be met.

What is Time and Materials? (T&M)

Here are some of the key Time & Materials Model benefits highlighted in our fixed cost vs. time and materials comparison:

  • Flexible terms. The team divides all work into stages, after which you check the work done and make changes if necessary.
  • The ability to quickly start working on a project. This model doesn’t get much ready, suitable for companies that value their time.
  • Hourly payment. You pay for the hours spent developing the product. Usually, the hourly rate is negotiated before signing the contract and is spelled out. All payments are made only after the completion of the work. There are also times when customers make a partial advance for the guarantee.
  • Software quality. At certain stages, the team will test the product and change to improve it. As a result, you will have a better product that meets your expectations.
  • Openness and high involvement in the processes. With such an approach, you can better track the development process, contact the developers more often. And as a result, your development process becomes more flexible, without harming your workflow.

Here are some Time & Materials model disadvantages highlighted in our fixed cost vs. time and materials comparison:

  • It is not always knowing when a project will end. Any edits, additional testing can affect the end of development.
  • Inaccurate budget. You will only have an approximate cost of the project, so you should be prepared for any changes. Moreover, the more needs you have, the more the project will cost.

When is T&M the Best Option?

The T&M paradigm is best suited for long-term projects or those that require frequent changes in conditions. Furthermore, this technique is excellent for projects where there is no defined amount of work and where development methods must be flexible.

What is the Difference Between Fixed-Price and Time and Material?

Fixed cost vs. Time and Materials is the main question of the article. And now we can define the fixed-price project vs. time and material difference. Let’s look at the fundamental differences according to different aspects:

In Management & Control

After agreeing on all the requirements and signing the contract, you can just wait until the design and development team does all of the work for you without you. You will have a lot of free time to build another project if you choose the Fixed-Price model.

The Fixed-Price model, given the difference between fixed-price and time and material, does not require the participation and control of the client at every stage of the process. You can focus on your company’s issues or just take a vacation while your project is under professional guidance.

The client manages the project budget using the Time & Materials approach. Furthermore, this paradigm causes additional control throughout the project. Depending on the internal goals, the client can adjust the number and makeup of the team, the work plan, the format, and the frequency of reporting.

Furthermore, the model’s flexibility allows you to modify both the speed of work (team size) and plans for successive deliveries based on the customer’s requirements.

In Billing & Payments

The Time & Materials approach involves hourly payment for the labor. The outcome is paid for by the client, depending on labor expenses. Estimates of the scope of work and project timelines are simply approximations. During T&M, adjustments are frequently made, and the most important thing is the outcome and quality, not the price and terms.

The key feature of the T&M model is that the payment is made considering the hourly rates of employees and labor costs. The transparency of work in the Time & Materials model simplifies budgeting for individual stages. With T&M, savings of up to 10-30% of the budget are possible.

The major disadvantage of T&M is that it is not clear how much time and money it may take to develop a product. These are financial risks for the customer.

The Fixed-Price model implies that even before the start of the project, the timing and price are precisely determined. That is a kind of guarantee for the customer that the project will be completed by the specified date and the agreed price. If it becomes clear that more tasks need to be solved than planned in the course of work, the outsourcer agrees to revise the budget with the customer.

In Work Process

Working with an agency following the T&M model, the customer is free to add or remove features and capabilities to the project at any time without concluding additional contracts and agreements. It is only necessary to remember that any new task is the development team’s time, which will have to be paid for.

Working with T&M, the developers always keep the client informed of the current affairs on the project. Transparency is ensured by regular meetings with the customer, presentations, and constant time logging in time trackers.

Customers who choose the Fixed-Price model usually create very detailed technical specifications. The customer does not have the opportunity to prioritize or exclude the performance of certain works during the project if this contradicts the contractor’s plan for delivery on time.

For all changes to a project performed using the Fixed-Price model, additional agreements will be required. 

Since the contract does not imply changes in requirements after the start of development, new knowledge and feedback from participants and people influencing decisions receive a lower priority compared to the project documentation under the contract. All modifications are subject to additional agreements and are paid separately.

Fixed Cost vs. Time and Materials [Company Size]

Fixed Cost Time and Materials
Startups + +
SMBs +
Enterprise +

 

So we can make some conclusions in our fixed-price project vs. time and material comparison. Fixed-Price is an ideal model for working on projects with clear requirements, limited budget, and specific deadlines:

  • for small products corporate websites, landing pages, one-pages;
  • for a separate block of work on the site redesigning specific pages, developing particular tools (for example, calculators), automating specific business processes;
  • for MVP (minimum viable product) the first version of the site with a minimum set of functions sufficient to meet users’ needs.

And the principal difference between fixed-price and time and material is that the T&M is best suited for large projects. Such projects require flexibility and do not have specific technical specifications and a list of functional requirements. For instance:

  • for products with an extensive and constantly updated list of functional requirements;
  • for automation and business optimization tools personal accounts, internet portals.

For Startups

Startups are an important point of our fixed-price project vs. time and material review. And the Fixed-Price model is most suitable. It can be used, for example, if the idea of ​​the project is not completely clear or the customer has not yet decided on the final goal of the project.

For SMBs

We can’t help but talk about small and medium businesses in this fixed cost vs. time and materials comparison. In such a situation, it is better to choose a Fixed-Price model as well. You can use Time & Materials too, but it depends on a lot of factors.

For Enterprise

Enterprise businesses should use the Time & Materials approach. This strategy works well since there are few ready-made solutions for businesses of this size, so you must develop everything from scratch.

Fixed-Price Project vs. Time and Material [Types of Services]

 

As part of the Fixed-Price Project vs. Time and Material comparison, one should also consider the difference between these models for different types of services. Let’s take a closer look at each process.

UX/UI Design [Redesign] 

Often, both models are suitable for a redesign. It should all be based on your expectations and if you know exactly what you want to achieve as a consequence. Also, an important aspect connected to the fixed cost vs. time and materials comparison is the size of the project and its type.

If the project is a startup, then it is best to choose Time and Materials. If you just have a regular business project, use the Fixed-price model.

Web App Development

You should consider the project size, budget, and product vision when selecting a collaboration approach for web app development. If we talk about a startup that has a limited budget, then the Fixed-Price model is the best option. However, if we talk about a startup that has enough budget and has a well-defined project plan – select Time and Materials.

Software Development

If you plan to create complex software and do not know what it should be at the final stage, then choose the Times and Materials model, and no need to make the fixed cost vs. time and materials comparison. 

The Fixed-Price model is appropriate if you know exactly what software you want at the end, what type of features it should have.

MVP Development

We have already mentioned that the fixed-price model is more suitable for MVP development. Companies that are going to project with MVP development can afford to spend only a certain amount of money on the project.

Fixed Cost vs. Time and Materials [Work Scope] 

Let’s look at the difference of the models according to the work scope in our fixed cost vs. time and materials comparison.

From Scratch

In case your project starts from scratch, you can implement both models. Although each development option requires careful planning of development processes. This is the main thing to do before choosing a model.

First, you need to estimate the budget, how much money you can spend on your project. The next one is the end goal and future and future improvements if any. If you can give yourself the answers to these points, then you should go for the fixed-price model. If not, pay attention to the T&M model.

Improve [Problems Fixing] 

In most cases, the Time & Materials model is used for this kind of work scope. However, you can choose the fixed-price project vs. time and material if you need to make global fixes to your projects, such as creating separate complex modules or new features.

Northell Experience

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Northell team provides exceptional product design and development services. Our team has already built 150+ digital products for companies from 45 countries.

Northell team has extensive expertise in:

  • UI/UX design
  • Web Development
  • Web & Mobile app design
  • MVP development
  • SaaS, eCommerce, E-learning platforms
  • Enterprise Portals
  • Custom Web App Development for businesses of any size

Our team showed great results and made Clutch’s Top 20 Product Designers & Developers and The Manifest’s Top 4 Product Design Team.

Our team works with both Fixed-Price and Time & Materials projects. In case you have any product ideas in mind, contact us! Our development team will help you deliver your project on time and in the best possible way. You focus on the core business goals, and we take care of the rest. 

More about our web development services, you can read here: Northell Web Development

Fixed Cost vs. Time and Materials: Summary

So, let’s make the final fixed cost vs. time and materials conclusion. A lot depends on choosing the suitable model of cooperation – the timing and cost of the project, its relevance upon completion. Therefore, before working with one of the models, it is necessary to dive into business processes, study tasks, and collect requirements.

After that, it will be possible to understand the difference between fixed-price and time and material and what is better in each specific case – Fixed-Price or T&M. 

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