Fixed price vs time and material based payment: What should you choose?

by Anna

Published on December 28, 2017

 

Many times, as an outsourcing body we are stuck at a basic question. Fixed price or time and material based payment? What payment plan to adopt when hiring an app development software house? You have determined your requirements. You have reviewed a few RFPs and have already selected a software house. You’ve met with the team that will bring your app idea to reality. You are confident of their credibility and you want to make sure you pay them fairly. You have the cost estimated and you are already talking to your budgeting team. But how on earth do you determine the desirable payment plan? Should it be a fixed-price project? Should it be a time and material based payment (T&M). How to lay out the contract. How to make that offer? In this article, we share some practical questions you need to ask yourself when creating your payment offer for the selected software house.

First things first, it is highly critical to get your estimates right. Get more estimates to factor out any cost fluctuations. We assure you that your time is well-worth it when spent on estimates. There are several unforeseen issues and unmet expectations that need to be factored into the estimates. When both parties agree on the estimate, the fixed-price or T&M dilemma is easy to solve. Let’s examine the questions you need to ask yourself during this decision process.

What is the Scope of your app?

A mobile app project is not a small undertaking. It will cost you a significant chunk of your income. And you definitely want to derive maximum ROI from this investment. Understand the scope of your project inside out and thoroughly. Get solid estimates and know the functionalities of your app. Once you are confident, you will be able to label a good price. You will also be able to determine whether the scope of your app demands a fixed price or a T&M. Once you know your scope, you will be able to bid a reasonable price too.   On the other hand, if you have some uncertain areas present in your project, or areas that have room for discovery, you should definitely think of a T&M payment option.  In short, a defined scope usually calls for a fixed price. And an undefined scope warrants a T&M.

Have you figured out the risk management associated with your app?

Think of these two relationships. With a fixed price you manage risks. With a T&M you bear the risk of variability. Sometimes a fixed price project will cost you more than if you paid through a T&M. For example, a $250, 000 project with a fixed price could have cost you $200, 000, if you paid using T&M. The project could also have cost you $300,000 if you went with T&M depending on the uncontrolled and variable issues. Hence a fixed price contract will manage your risks. You are guaranteed that the project won’t cost more.

Do you need payment flexibility?

Some projects may cost more than you can afford at a particular time. The question is, what kind of flexibility do you need? T&M contracts provide a lot of flexibility.  Fixed price contracts are not as flexible.

In a T&M payment options, you pay the team at an hourly rate. You decide how they spend their time and what tasks they need to prioritize.  Once the job has started, you do not have much flexibility to make changes unless it is complete. Which is why you need to be thorough in your agreements. If you are unable to achieve a solid estimate on a project, go with T&M. And the fun part is, that you can specify fixed price payment for some aspects of the project and T&M for others. Sometimes, insufficient data can hinder your ability to decide what payment type to choose.

What if your client is ok with you developing the project in any way? A fixed price option is a better choice. Also, if the client wants you to work in any way AND provides a few team members from their side to work with, T&M is a wise choice. You cannot be held responsible for uncontrollable team members and their actions! On the flip side, you have a client who belongs to a large organization or an enterprise. They believe in a lot of meetings and bureaucracy. Go for fixed price and a very clear SOW (Statement of Work) right from the beginning. Finally, break down a very large project into separate contracts and payment options. This will keep things manageable for both parties.

Conclusion

Picking the right contract type is an important factor in the overall success of your project. Sorting out the strengths and weaknesses of both options when applied to your project, should help you set clear payment plans.

Read more about budget estimation for your app development: How to Estimate my Mobile App Development Cost

 

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