Before selecting the appropriate cooperation model with an IT company, it is first worth considering all the possibilities that can be obtained from a particular pricing model. If you go deeper into the issue, two types of contracts are the most popular: “fixed price contracts” or “time and materials” contracts. The choice of the optimal model of cooperation is of great importance. The consequences of a wrong decision can be serious and have a significant impact on the result: lack of possibility to change functions, quick project, lots of defects and so on can lead to exceeding the project’s estimated budget considerably. The right contract type is important, so you need to think carefully so that the final product will meet your expectations.
If you are looking for a software development company or you are ready to conclude a partnership with a particular client, and you are willing to choose the appropriate type, you, first of all, have to read our article where we will examine the difference between fixed price vs time and materials contract in details. We will cover in detail what is a material model and when a fixed price is reasonable, in which situations each of these contract types and many other nuances are worth using.
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Fixed price contracts work on the same principle as it sounds – the customer agrees on a final cost and pays a certain amount to the development team in exchange for the finished product. Fixed fee contracts are one of the most popular cooperation models, as companies feel secure because they minimize financial risk. The client has a pricing contract and a fixed budget, so they will only pay what is necessary. A fixed price agreement can be attractive if a company needs to budget carefully and allocate its costs wisely.
Besides, fixed-price contracts can boast another indisputable advantage – the customer has a deadline by which software development must be completed, and the client is assured of receiving the finished product. If the customer has a specific plan that will specify the desired result, and the basic goals of the project and development stages, it will be much easier to control the work process. It is worth emphasizing that the customer does not need to make special efforts to control the development process because, in this situation, everything is clear and understandable. If the project’s scope is relatively small, all options are clearly described, and there is minimal risk of deviation, then the presented pricing model is best suited to this situation.
Compared with the previous model, time and materials contracts work slightly differently. There is no fixed price – the client will not pay a fixed sum of money at the start; time and materials pricing is based on the fact that the service provider will receive money from the client for the hours it takes to complete the project and the materials used to do so. It is a key difference from the previous model. Material pricing and time costs can be different.
Time and materials contracts are relevant when the client needs help to estimate how much time it will take to complete the project and how much it will cost, so in this situation, software development has no fixed price or strict deadlines.
Regardless of what type of project needs to be completed, the right pricing contract will give you a clear idea of how much you will need to spend to achieve the desired result. A fixed fee is an excellent solution for some projects, while others require more discretion. A fixed-price contract cons has a undoubtful advantage – having a defined and clear process detailed in the agreement. The desired outcome is specified for all of the responsibilities of each party. Often the fixed price model is used by businesses at the outset. It is easy because the service provider can sell their work for a fixed price. But the fixed price agreement has certain risks.
If the project exceeds the fixed price or the planned time spent on it, the developer’s profit is reduced. The advantage of time and material contracts in this situation is that they allow you to create a buffer in a certain price to account for unforeseen circumstances requiring additional time and material to complete the project.
Fixed price contracts are a standard solution for B2B and B2C companies, but it’s worth noting that not all types of services have fixed fees. Many situations require the flexibility of time and materials contracts to establish cash flow for the work done properly. Not all companies have a good understanding of what type of contact works best for them. In this situation, it is worth delving deeper into project management to find the best solution for your needs.
A bad contractor who uses an unsuitable pricing model for his services often faces the following problems:
To open up new features for your business and establish optimal budget management, we recommend reviewing the advantages and disadvantages of each contract model to retain your current clients and develop new ones to increase your profits.
There are several important variables to consider when choosing the right contact model:
The service provider can decide which model best suits it based on the specifics of the business, the client’s needs and other factors.
The main advantage of a fixed-price contract is that the contract terms provide a price guarantee. As long as the project does not go beyond the contracted scope, the cost of services does not change. Often this type of contract involves a defined process with a set of prescribed steps and specific deadlines that must be met. For many companies, this type of project is straightforward.
But in some situations, due to the soft buffer zone in pricing, it can be seen that the client is overpaying compared to if they had chosen a materials contract. This format implies a greater time commitment for preparation. A full contract renegotiation will be required if the client wishes to make project changes beyond the approved scope.
If the services constantly change and improve over the project’s life, there are better solutions than a lump sum contract.
Material contracts also have some advantages. There is no fixed total cost. Due to the rather high flexibility, it is possible to compensate for unforeseen changes and so on in this situation. Here there is a win-win situation – the client pays for what he gets, and the contractor gets an hourly rate according to how many resources have been spent. Materials model means that the time and costs can always be tracked, and the cooperation is carried out under the most transparent conditions.
At the same time, this flexibility brings risks. Materials contracts can easily exceed certain limits. If a project was initially estimated to last four months, it could quickly turn into a six-month project if the customer keeps making changes and improvements. In addition, if the client has set a specific financial framework, you must control costs at each stage to stay within the budget. Also, the parties to the contract have to communicate constantly to control the project throughout its implementation.
At the same time, it is worth noting that because services are paid for in time and materials, efficient work may produce less a result than if a fixed price had been set.
Fixed price contracts are best used in the following situations:
The time and material model is suitable for the following situations:
A fixed-price contract is often used when it is necessary to implement a small project with strictly limited functionality and no modifiable functionality. As a general business example, this type of contact is implemented in practice in the following ways:
A lump sum is entered in all these situations, clearly spelt out in the contract. The set price cannot be changed.
Time and material contracts often look as follows – for example. The contract stipulates that the hourly rates are additional $50 is 20% on any goods purchased. It may also specify an allowable material pricing – it may be stipulated that the customer will only pay up to 2,000 dollars for a job or will not pay for more than 100 hours of work.
In conclusion, time and materials contracts and fixed price models make cooperation with a software development company more comfortable. Moreover, it makes the entire project less risky. A certain type of contract ensures that the service provider will give you with high-quality software projects that fully meet your needs and market trends.
The development process can be based on any contract if you have a fairly small project and your requirements are clear and feasible without too much difficulty. However, a fixed-price contract model is best suited to this situation. Long-term projects need a more deliberate approach – a time and materials contract is a good option.
