Fixed Price or Time and materials: in pursuit of the ideal contract

Fixed Price or Time and materials: in pursuit of the ideal contract

Choosing the ideal contract agreement with your tech partner is essential when it comes to software development. Learn from one of our Projects Managers some insights that will help taking the right decision between Fixed Price or Time and materials contract.

time and materials contract

Suppose your company has completed the search process of the ideal tech partner or software development company in order to achieve your goals and everything is set to start working. Now, it’s time to sign the contract…

Which pricing model will be the most beneficial? Time and Materials contract or Fixed Price? The answer is not so straightforward: It depends on the type of project, the time required, the budget, the solution’s scope, among other factors.

Not having clear which model is best can have consequences that might affect not only the relationship between the parties but the quality and product. So what should you do? Learn the differences between the two most common types of contract when it comes to outsourcing software development and know the opinion of an expert to help you define which way to go.

Briefly… What does each agreement imply?

Time and Materials contract:

A specific hourly rate is billed monthly so that a team of professionals performs development, including all the necessary hardware or extra staff. In this type of contract, process length doesn’t matter.

    • It is flexible because it gives the customer the possibility to make adjustments to the development, according to their needs or new requirements as the process progresses.
    • It works well when the scope of the solution is not completely defined or lacks specification, or when you have requirements specified at a very high level.
    • It guarantees the client that the final product is what he really needed.
    • Agile methodologies are well suited for this type of contract because they are prepared to respond quickly and effectively to changing requirements.

Fixed Price

It is a set amount charged for a service/product that has been defined in its entirety in advance, generally associated with a specific delivery time product.

  • It easily adapts to small software development projects, with clear requirements and specifications.
  • Usually, they don’t need the client´s constant control.
  • It is the simplest option for having a clear and defined budget; however, the client can potentially overpay for requesting adjustments that weren’t included in the initial contract.

To make it simple, let’s look at this table:

Time and Materials chart

To gain a deeper understanding, Hexacta‘s project manager, Eric Delahaye talked to us about how this contract choice impacts on the customer, the development, and on the final results.

Hexacta: In terms of effectiveness, what can we say about these contracting models?

time and materials Eric delahaye

Eric Delahaye: “It is important to note that regardless of the type of contract, the client usually has a fixed budget, or at least a maximum investment figure, as well as dates in which they need the development finished. This reality is common to both types of contracts.

When the request is fully defined and the customer knows exactly what he wants and its scope, it will easily adapt Fixed Price model.

On the other hand, Time and materials contract has a higher level of flexibility that allows adapting to changes and new requirements. The Fixed Price contract is often unrealistic in the software industry, which can lead to failure.”

Hx: Why is it unreal? From what we can see, many companies still prefer this type of contract with its tech partner.

ED: “It is true, many still prefer this model, and the main cause is their fear to fail. It is natural to think that you have a budget, time, and a particular product, and you want the project to be made on time and budget. Generally, companies feel safe with this contract model because they think that the definition and scope that they have of the project are very clear and that there won’t be problems along the way.

The truth is that it’s very difficult to get a fully detailed and specified development since the beginning and, therefore, to guarantee success. While there are many techniques to properly estimate, it is very likely, in our experience, that if a customer chooses to use this contracting model, they may receive a different final product than what they expected.

At Hexacta, we understand the nature of both types of contracts and have enough experience to address them. Therefore, to establish the best agreement with the client, where both of the parties win, we take into account the type of development, time, and budget, among other variables.”

Hx: Does this affect the development?

Fixed Price or Time and materials

ED: “Any kind of change that is not contemplated within the Fixed Price Contract can generate discomfort between the parties since it requires negotiation for the new requirement and generally implies increasing the price of the project. Many times these issues are not positive for the relationship with the client.

The development is affected to the extent that often the delivered product does not meet expectations or does not solve the need for which it was conceived. Many software projects fail and the main reason is the contract model choice. For example, a Time and materials contract have greater flexibility to change, make partial deliveries of project progress (sprints every 2 weeks, for instance) and the client is more involved in the development process. This guarantees that we deliver the best product possible, considering the client’s needs and tailored to their budget and time.

As we are aware that hiring Time and materials constitutes an ‘act of faith’, from Hexacta we care to prove that we are the best on developing software, thanks to, among other things, having high-performance teams that are experts in different technologies and methodologies. We usually start with a prototype (proof of concept) so that the client can see the quality of our work, our response time, the use of the right methodologies, etc.”.

To sum up

Choosing what kind of contract to sign with your technology partner is a key factor in the success of any development project. It is important to take into account that, usually, during any software construction process new requirements and needs emerge.

If your company needs a solution that can adapt to market changes and new requirements, the Time and materials contract is the best choice. Moreover, in a context where agile methodologies seized the software world, this alternative is the best return on investment to your business.

Have you ever had any particular experience that is related to the type of contract you chose and want to share it with us?

 Questions? Comments? Concerns? Contact us for more information. We’ll quickly get back to you with the information you need.