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The Dilemma of Time & Material vs Fixed Price Engagement Models in Software Development

Goran Kalanj, CEO

All software development projects, regardless of the engagement type, have one thing in common - the goal to develop high-quality software with all the necessary functionalities and features. Besides the goal, there are usual constraints like timeframe and budget. In addition, one of the crucial constraints can be specific knowledge.

Anyhow, choosing the engagement type is a crucial step because it directly affects cooperation success because different engagement types have different types of management and different prerequisites.

The Most Common Engagement Models

There are two the most common engagement models in software development cooperation: Time & Material Model and Fixed Price Model.

Although their names sound like it is only about a billing method, these two engagement types are profoundly different in how they are managed and the prerequisites for success. In addition, the capabilities and preparation of the client are also very important. While in the Time & Material Model software development services provider assigns a team of engineers working full time for the customer and the service is charged based on hours spent, in the Fixed Price Model the software development services provider takes full responsibility for the whole project, manages it and has to deliver within agreed time frame and budget.

Companies that provide software development services usually work on both mentioned cooperation models, while some specialized in one specific model. Those specialized in Time & Material Model of cooperation put more focus on development role and have less resources in other roles like project manager, business analyst, etc. Furthermore, they also put a lot of focus on having a well-defined and efficient onboarding model and team management throughout cooperation which is usually long-term.

On the other hand, those specialized in Fixed Price Model of cooperation put more focus on business domain knowledge, testing, project management and business analyst skills. This makes a lot of sense since in the Time & Material Model of cooperation, the standard way of working includes the estimation of men/day effort and time in which some functionality will be finished, and this is mostly for planning purposes, not for invoicing. Invoicing is done based on services that are actually delivered.

Time & Material Engagement Model

The Time & Material engagement model type is very suitable for Agile methodologies, especially for Scrum. This engagement model is suitable when developing a new application using a lean approach, starting with the Minimum Viable Product (MVP), and then defining and developing additional features in an agile manner based on customer feedback.

The most common advantages of the Time & Material Engagement Model are flexibility and transparency. The client is closely managing the team, which means that the client can directly control the performance of arranged personnel and, if needed, for some team members a replacement can be requested. This results in the fact that the client is charged exactly for the services delivered. In that case, it is not needed to have the functionality written in detail before the project starts. Software functionalities can be defined and easily changed during the project.

On the other side, the most common disadvantage of the Time & Material Engagement Model is that the client has to be actively involved in the management of an external team throughout the project. If the client does not have precisely defined software functionality requirements, which is usually the case, then also it is not possible to precisely define project costs and deadlines.

Fixed Price Engagement Model

The biggest catch of the Fixed Price Engagement Model is that the client needs to precisely define all the software functionality requirements before agreeing on cooperation. This is the main reason why this cooperation model is most suitable when the client has already successfully finished at least one project in the Time & Material Engagement Model. This is the case because the client has to have more trust in software development service provider compared to the Time & Material Engagement Model, meaning that the biggest responsibility for the project results rests with the software development services provider.

Usually, clients have a general picture of what the new application should do, while some details will be defined during the project. Although it is needed to have a general picture, it’s not enough for proper estimation, resulting in an unreliable estimate of price and deadline. Experience has shown that clients often cannot define all the software functionality requirements in as much detail as necessary. That is the main reason why most Fixed Price Engagement Model projects fall far behind schedule and break the budget. In other words, Time & Material Engagement Model is a better cooperation model when the software functional specification is not defined in sufficient detail.

The lack of flexibility in the Fixed Price Engagement Model is something that can be very limiting if requirements change during the project. For each new requirement, a new estimation has to be made, meaning that a new negotiation round is on the table, and the implementation starts only after reaching an agreement. This may not be a problem if change requests are rare, but if they happen often, the whole cooperation becomes inefficient, and the development process slows down.

Final thoughts

The choice between Time & Material and Fixed Price engagement models in software development is a crucial decision that can affect the success of a project. Both models have their advantages and disadvantages, and selecting the right one depends on various factors such as project complexity, the level of detail in the requirements, and the client-provider relationship. To make sure that chosen model is the best fit, it is important to realistically analyze the needs, expectations and the level of preparation and capabilities on both sides. Companies usually start cooperation with a new partner in the Time and Material engagement model, and later, when there is trust, it is much easier to agree on the Fixed Price engagement.

While the Time & Material model offers flexibility and transparency, allowing for iterative development and adaptation to changing requirements, the Fixed Price model provides certainty in terms of budget and timeline, but requires a comprehensive understanding of the project requirements upfront.

Ultimately, understanding the nuances of each model and aligning them with project objectives is key to achieving successful outcomes in software development partnerships.

Feel free to contact us to discuss which engagement model best suits your project needs.

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