Time and Materials vs Fixed Price: pros, cons and how to choose

Pricing is one of the top concerns when it comes to outsourcing software development. 

However, your budget is not the only thing that matters–it’s all in the pricing structure. The most common contract types for software development are Fixed Price and Time and Materials. Most companies who outsource IT projects will have to choose between them early in the project’s timeline. 

The problem is that there are many misunderstandings when it comes to pricing models. For example, that one is definitely better than the other in all aspects. Many companies believe that one is more cost-effective than the other. 

So, if this isn’t true, this leaves you with more questions than answers. What are the factors that you should consider? How to decide which one is right for your company? And, most importantly, which one would work best within an agile context? 

In this article, we’ll answer all of these questions and more! 

What is the Time and Materials contract?

The Time and Materials contract means that you pay for the hours worked and materials used to complete the tasks.

It’s the preferred pricing approach for flexible requirements that change often. The projects are generally more complex, have flexible deadlines and sometimes don’t have a clear direction from the start. This is especially true if the project needs to change based on dynamic market conditions. 

In some cases, you can use a blended rate for all roles in the team, such as software developers, business analysts, and QA engineers.  This adds more simplicity to budgeting and forecasting. 

What are the pros and cons of the time and materials contract? 

Time and Materials pros include:

  • You have more control over the project 
  • The project can often change directions, scope, requirements 
  • It’s easy to keep track of costs by setting hourly rates at the beginning of the project and monthly reports. 

Time and Materials cons include:

  • You need to be more involved in the project implementation process 
  • It’s harder to predict total expenses, especially if the project becomes more complex over time. 

What is a Fixed-Price contract? 

In a Fixed-Price contract, you agree to pay a lump sum to the IT partner for delivering a project. The project usually has a specific deadline and milestones.  

This type of contract usually works best for projects that have a defined scope, with little variability in requirements. The final price also depends on technical complexity and risks, project governance, and team size. 

At first glance, it seems like an attractive model for companies that have a more strict budget. However, in reality, both models can incur additional costs. Since most industries are unpredictable, it’s also very difficult to define all project requirements at the beginning of a collaboration. 

What are the pros and cons of a fixed-price model?

In general, Fixed Price cons include: 

  • Requirements can often  change during the implementation, which derails the project and makes it hard to deliver what was initially promised
  • Project changes are harder to make since you need to re-discuss project requirements with various stakeholders and get approvals
  • You have less control over the development process. 

The Fixed Price pros are: 

  • Higher predictability as you have a deadline and milestones
  • Lower involvement, as the software development company will take care of most of the tasks 
  • Good for some types of projects, such as building a minimum viable product (MVP). 

What are the differences between Time and Materials and Fixed-Price contracts? 

These are not set in stone, but you can use this as a guideline to understand common practices: 

Again, what’s considered a con for a business can be a pro for another. For example, you may not need or expect predictability since your project is undefined from the start. If your IT provider organises workflows carefully, you can estimate the cost of the project. You’ll also have regular meetings and receive reports regularly, so the pricing will be transparent. 

However, there is a special case where the Time and Materials model makes a lot of sense–the agile context.

How do you contract an IT project in an Agile context?

Fixed Price seems great in theory and mostly for waterfall projects. If you choose an IT partner that works agile, you’ll see that Time and Materials is the best fit

In most agile projects, it’s hard to determine requirements at the beginning. And, most importantly, agile values customer collaboration over contract negotiation

For example, here at Qubiz, we recommend Time and Materials whenever possible. In our experience, it goes hand in hand with the agile approach as you’ll have: 

  • Less management overhead: integrating your in-house and a Qubiz external team means that you’ll manage them like the same team 
  • Embracing change: instead of waiting for approvals, which takes a lot of time, we prefer to simply get things done 
  • Prioritize what’s important: priorities may change without renegotiating contracts. Instead, the focus should be on delivering value
  • Know-how retention: keeping a "core team" means that the know-how remains within the team
  • Quick scale-up / scale-down: even if you have a core team, you can add different specialists through a “flex team,” depending on your needs and workload
  • Continuous progress: the project advances even if the business decides to change directions or goals 

All in all, this is a good and safer approach that many of our clients prefer. 

Fixed Price versus Time and Materials: What should you choose?

The choice is up to you, according to your context and business needs. At Qubiz, we work with both pricing types, but most of our clients immediately recognize the benefits of a Time and Materials approach, especially in an agile context. 

However, each project is unique. In some instances, companies can only work with a fixed budget, especially if they’re accessing outside funding. We understand that and accommodate your needs by splitting the larger project into short-term goals to make it more manageable. 

Find out more about how we can help you optimise your costs and improve productivity and efficiency across your entire business.

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