Time and Material (T&M) vs Fixed Price. Pricing in Software Development: The Common Myths

If you’re looking to outsource software development, there are essentially two pricing models you’ll come across in most software houses: time and material model and fixed price projects. It might not be immediately obvious which one to go for and a lot of myths have arisen around both. So if you’re in doubt about how to price your next project, read on to learn about what to watch out for — and why we recommend only one of the approaches (guess which).

• We will introduce the definitions of fixed price and time and material models.
• We will tell you about 5 myths about fixed price agreement…
• and also time and material agreement myths.
• When to use which project pricing method — the main comparison of the two models.
• So…which is better?

First things first — what exactly is fixed price and time and material models?

In simple terms:

• Fixed price: As the name suggests, it’s when you and your software development company agree on a fixed amount for the whole project (or its part).
• Time and material (T&M): It’s when the price you pay reflects the actual time spent by developers working on the project along with any other people like project managers, team leads, etc., their hourly rates, and the resources used in the process.

Both are based on different assumptions and reflect a completely different way of looking at software development projects (think waterfall vs. agile).

In the case of a fixed price agreement, you’re basically buying a product with a single, fixed price. But unless you’re actually buying software off the shelf, you need to remember that’s a tailor-made product, based on your specs and requirements and a detailed scope of work. It’s mostly used by companies working in the waterfall model and never a good idea when you’re agile. And it might work if you have a definite vision and a (very) detailed specification that is certain not to change. With a focus on “might”.

A T&M contract, on the other hand — instead of taking an educated guess — takes into account all the dynamics that go into software development, like changing requirements, upgrades, and probable risks. That’s why most software houses (including ours) favour the time and material pricing model these days, although the fixed price model still has its applications.

At Asper Brothers, we have some strong views on the effectiveness (and ineffectiveness) of both models and definitely favour time & material. Here are some common myths we wanted to debunk — so you’re more comfortable making the call when pricing your next project.

Fixed price agreement

Myth 1: It’s predictable

You know exactly how much you’re paying, and what you’re paying for. So you can include it in your budget and not worry about it ever again. And there are no uncertainties when it comes to the product itself — it’s all you’ll agree on initially.

The reality:

I hate to break it to you, but the experience of software development teams around the world shows it’s hardly ever possible to give a 100% accurate estimate that’s bound to never change.

Besides, a rigid scope of work is more than likely to cost you more, because any improvements or even bug fixes can be treated as “out of scope” work. It leaves hardly any wiggle room, so in the end, you’re in fact paying more — and probably more than you would’ve paid in the time & material model. And that’s without being prepared for it (because, after all, everything was “fixed”), which might mean a domino of consequences for your business.

Plus, from my personal experience, I don’t think I’ve seen a fixed-price project delivered on time in my career. That’s more like a mythical creature to me.

If you want to read the whole article, clik here.