Solving the Dilemma: When to Use Time & Material and Fixed Price?
May 4th, 2017
When it comes to making a decision that will impact your business, one has to consider all the possibilities. However, the choice is not always easy when you have not had experience with either way.
So we're here to help you figure out Time&Material and Fixed Price models and when to choose which, to make the best out of it.
There is no right or wrong answer in whatever path you choose to take because it all depends on your business, budget, and plans for future. We do hope, however, that the following information will make the burden of choice easier for you.
| Cooperation Model | Time & Material | Fixed Price | Dedicated team |
|---|---|---|---|
| Flexibility | Flexibility to change | Clearly articulated scope / Less flexibility needed for scope changes | Flexibility to change |
| Scale | All | Small and medium | All |
| Risk | Low risk for service provider / Moderate risk for client | Low risk for client / High risk for service provider | Low risk for service provider / Low risk for client |
| Budgeting | Floating budget | Specific/limited budget with predicted needs for few years | Fixed monthly budget |
| Provider's Margins | Effort-based | Milestone-based / Project competition based | Resource-based |
| When Can You Start? | Initial engagement | Significant time spent to understand the customer's IT processes | Initial engagement |
When to use Time & Material?
- When your project (or projects) is spread over a long period of time - several months or even a few years
- When your requirements are not clear and you're defining them as you go (which is often a case with startups)
- When you require a high degree of flexibility
- When you want the processes of the project to be tailored to your requirements
- When you want to be in direct control of your resources
When to use Fixed Price?
- When you really know what you need and your requirements are clear and defined in detail
- When your project is short-term (a few days to few months)
- When you don't need flexibility of the project requirements because everything is clear
- When you want/need to determine the exact project's budget in advance
- When you don't need the resources to be controlled directly
We recommend using Time&Material pricing model because, from our experience, there is always a feature or two that arise during the project development that the clients want to add. Because Fixed Price's main trait is its stability, adding functionality to the project scope after it has been approved is not possible. (But again, if you're sure what you need exactly from the start, it may be the way for you.)
Read more about Fixed Price, Time & Material, and Dedicated Team in our other blog posts.
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