Outsourcing Contract Types Review: Fixed Price vs Time-and-Materials vs Dedicated Teams
Software Development Pricing Model
In the broadest sense, software development is the process of analysis, creating architecture, writing code, creating a design, testing, and implementation. But in fact, things are a little more complicated, because the development begins with the choice of the software development pricing model that the market provides to business today, so let’s talk about types of contract in software development.
Time and Material Project
Time and material project – sounds like a model when the customer pays for the time, in fact, this is not entirely true. Using this solution, the customer pays for the result, based on labor costs. Generally, payment goes for the time spent on the development of specific tasks by the executor’s team and not for the time they chill.
Time & materials or fixed price contract is most often used when it‘s difficult to determine the final requirements of the product or its price. Also, this method of financial interaction is perfect for small and medium-term projects which don’t require large dedicated teams (on average – 1-3 specialists). So let’s talk about pros and cons.
Pros of T&M model:
- Efficiency. The client can quickly change the work plan or change the requirements;
- Flexibility. T&M perfectly combines with modern agile methodologies, for example with Scrum;
- Result. The ability to see the result at all stages of development as well as constant monitoring of the progress of work and interaction with the team. This enhances the likelihood of getting what you want.
Cons of T&M model:
- Budget. It is not always possible to estimate the budget in advance. This depends on the accuracy of the specifications or its changes in the process of work;
- Communications. With this approach, you might have to spend a lot of time in communication with the provider. On the other hand, this is an undeniable quality advantage of the future product.
Dedicated Team Model Comparison
Dedicated Team may sound similar to the first case, but has some big differences. Usually, the price for such team comprises a monthly salary of all hired employees + additional costs for administrative needs.
With this approach, the customer forms the future team – the number and the necessary level of all specialists. This can be useful for example for long-term projects with unclear requirements or big in-house projects when the customer doesn’t have enough staff. Also, the customer can manage this team by himself, and the administrative part of the work falls on the provider.
Pros of dedicated team model:
- Control. The customer can perform full control and management of the team, determining the workload;
- Professionalism. Individual approach to the personnel selection of specialists, their level of knowledge and understanding of necessary technologies;
- Reduced costs. The remote team solves many time-related issues with the recruitment and hiring of staff, as well as the number of the group, plus you always know the next month’s payments and taxes.
Cons of dedicated team model:
- Specifications. Working with incomplete specifications, the remote team can make a project based on own preference, which is not always a good idea. Although most of these experiments justify themselves in case of experienced teams.
Unlike other models of financial interaction, Fixed Price is best at showing itself on short-term projects (about a month). For example, when a customer wants to work with a new provider, minimizing risks with a small pilot project, which will take a month or two for development. Or in long-term projects lasting several years.
However, unlike Time and Materials and Dedicated Team concepts, Fixed Price assumes the availability of all necessary documentation for the project, all specifications as well as a strict implementation of a plan and workflows. This approach can be used only when you are sure that the product requirements will not be changed in the future. And in force majeure event you often have to sacrifice functionality for the sake of deadlines.
Pros of fixed price model:
- Specifications. Well-formed specifications allow you to get what you exactly need;
- Deadlines. The development process and deadlines are approved in advance, so the project is likely to be ready and delivered on time.
Cons of fixed price model:
- Risks.With such model, it becomes difficult to manage risks and also critical to remember to keep within the budget;
- Management Generally, often a specialist on the performer’s side deals with the management, so sometimes it’s hard to check at what stage the project is or how much it corresponds to expectations.
T&M vs Fixed Price Model Comparison
The fixed price agreement is a contract with the appointed (and unified, not vary throughout the duration of the contract) price in which the provider undertakes to complete the project for agreed cost. More often such model is used by companies when the customer already has constant specifications for the product, which will not change during the entire development period. This model is the choice of product companies that have a sufficient number of specialists who can correctly communicate with developers. T&M vs Fixed Price model comparison is actually not an issue if you know when to use the exact model.
A fixed price model is often used if:
- A small project is needed;
- In case of tiny workload;
- Small (or fixed) budget;
- For long-term projects with clear specifications;
- As an option for startups – to create an MVP.
Time and material agreements model offers alternative advantages – here, the foreground is billing for the work done, which is most often based on hourly wages. The advantage will be the ability to change the requirements provided to the product.
When to use T&M:
- When developing medium-term or long-term projects with the possibility of changing requirements;
- If the scope of work for the project is not yet fully known;
- In case it’s necessary to see progress at all stages of development.
Today outsourcing is no longer a simple concept but a choice of various options for product development and the choice of a price model. That is why it is important to understand how it differ and how the right one can help to save your time, funds and give other benefits. So, what to choose: Fixed Price, Dedicated Team or Time and Material – is a matter of company’s needs.