One Engagement (Pricing) Model to rule them all — Time & Material Model

Often it becomes a perilous decision for companies to decide which Engagement model to use. We at Tilicho Labs follow the Time & Material model.

There are other models also such as Fixed Bid model, Hybrid model, Shared Stakes (Risk/Reward), etc. All of them have their pros and cons. Different companies in different industries may find different model perfect for them. Let us see what the T&M model is and why we believe it reigns supreme above all other engagement models for us. First let us understand the T&M model.

What is T&M model?

Time & Material model (aka Time and Resource model) — In this model we charge for the total efforts and the resources at a decided rate. The rate can be calculated in hourly, half-time (4 hours), full-time (8 hours), weekly or monthly engagements as per the project requirements. (Yeah you’re right, just a fancy term for charging by the hour)

Advantages of T&M model

• Flexibility (When the client has multiple different ideas) — Allows clients to modify the scope of the project, revise designs or features, and add functionalities in the project, while the work is in progress. If the client wants to try more than one design/features combination, before going live with his app, this option is the perfect match for him.
• Dynamic work scope (When the client is not sure of his requirements but of only what he wants to achieve) — With most of the projects there will be a general goal that should be achieved, however knowing how it’ll be reached is not that important beforehand. Often for startups and mid-sized companies it is better to make decisions in the process, evolving a strategy and building custom software simultaneously. The same holds true for larger & complex projects. Such approach underlies Agile methodology.
• Immediate Project Start — If the client wants to start the project immediately and does not has time to go through a lump-sum bidding process, this model turns out to be a savior. Rather than figuring out the scope of the project, deadlines for deliverables or key milestones in advance, we can start the project immediately and gradually come up with these estimates.
• No Overpay/Underpay — There is no overpay as we are paid for the actual cost of work performed. Also, there is no underpay since we are always ensured of being paid for our efforts, unlike the lumpsum model where we might have to work for much more time than what we are getting paid for.

Disadvantages of T&M model

• Budgeting risk/Low budgeting control — This is the main disadvantage of this model. Overall cost for the client can go far beyond the expected cost during the development process. According to the client we don’t have any incentive to control the costs.
• Deadlines — Deadlines may change frequently as the product roadmap is updated and it is difficult to predict when the final product will be ready.
• Pricing hourly punishes efficiency — there is no incentive for the company to be more efficient since it is getting paid for the number of hours worked for the client and not for the efficiency. This might not be the case with most of the teams, but clients will always be critical.
• Billing Disputes — If the final billing amount exceeds the estimated amount, client may think we have inflated our time sheets or have been inefficient which may lead to billing disputes.
• Additional Work — Counting the number of billable hours is an added task and requires employment of additional monitoring tools or manual record keeping by employees. Similarly determining a profitable and competitive rate is a challenge and will require a cost analysis.

Addressing disadvantages of T&M and Establishing transparency & trust in the billing process

Transparency and Accountability are the 2 most important tenets in gaining client’s confidence

1. Being clear Upfront — We should be especially explicit when it comes to defining our pricing approach. The following things need to be clearly defined.

• How we track billable hours
• What is the hourly/monthly rate we will charge
• What will be the timeline/frequency of billing? (whether monthly once, or weekly or at the end of the project, etc.)
• Disclaimer regarding the Cost & Time estimation
• All these things should be mentioned in the contract/agreement

2. Mitigating the problem of Budgeting Risk & Timeline via Estimating Cost, Time & Schedule

• Based on clients’ needs, define deliverables (general descriptions of the end result)
• Break down deliverables into task lists and milestones
• Define the activities along with their sequence and inter dependencies
• Estimate activity resources and duration
• Prepare a detailed schedule and give a cost estimate (with a margin of error & a disclaimer)

The cost and time estimates along with error estimate will help reduce the budgeting risk associated with Time & Resource model and also give the client an idea of when he can expect the project to finish.

3. Mitigating Trust Issues regarding efficiency with Time Sheets & regular updates (Being Accountable)

• Regular updates/Supervision (weekly, monthly, etc.) — Regular project progress updates will establish a transparency with the client when it comes to our efficiency. These progress updates can be manually prepared for the client or the client can be given access to our project management tool to enable 24x7 monitoring of our project progress.
• Detailed Time Sheet — By showing clients that we have tracked our hours meticulously and by providing our project time cards, clients will be more likely to pay us for our time and to believe in the accuracy of what we report. We should have time cards both chronologically wise and feature/functionality wise. This will also help us in assessing our strengths and weaknesses.