Time and Material, Fixed Price, Fixed Budget: benefits, risks and limitations

pricing models Time and Material, Fixed Price, Fixed Budget: benefits, risks and limitations

The issue of payment is one of the key moments in the product development process. There are several principal pricing models each of them having its own advantages and disadvantages, being for some projects the most effective solution and for others a week one.
 
A client wanting to develop an application has to answer an important question: which pricing model to choose – Time and Material (hourly rate), Fixed Price, or Fixed Budget (one should note that there are alternatives, but we’ll focus on these three payment methods as they are not only the most popular ones, but have lots of benefits)?
 
This issue is topical not only for customers, for us, developers, it also has great significance. Why? For us a pricing model defines lots of things: how the whole development process will be going (and also communication), how easily changes will be implementing, will a client have the possibility to make changes in a technical specification (or will it be difficult or not), will the timeline be strict etc.
 
Now let’s consider the pricing models in terms of their benefits, risks and limits.

 
Fixed Price 

 

Fixed Price model has many peculiarities. It implies the estimation of the scope of work based on technical specification provided by the client. The price and timeline are determined. A customer receives a guarantee that his project will be done by the indicated date and for the estimated price. Undoubtedly, it makes this model very attractive and convenient for clients.
 
As to correctly calculate all the project scope, time (even the approximate) needed not only for each product development stage, but for each task, is a rather complicated goal, the specification starts to play a significant role. It must be very detailed and high-quality – no uncertainties – and include product’s tasks, objectives, the description of challenges it must solve, functionality and ways of its implementation, design mock-ups, system architecture and structure, application type (web, native, hybrid), platforms for which it’s created (will it be native or cross platform app development) etc. A detailed technical specification removes risks of receiving a low-quality product.
 
So, Fixed Price will be an effective solution for such projects as it allows to know the price and time needed for the development from the very beginning. However, it has some limitations.
 
First of all, it’s necessary to take into account all possible risks associated with third parties participation. It can be Apple Review, integration with Facebook, operation system update etc.
 
Also each change must be accurately described and planned considering developers load, which requires tasks coordination and scheduling taking up to a few days. Another weak point of changes is documentation update according to changes in the scope of work.
 
Delving into this issue it should be noted that a development company often plans the start of the following project after the end of the current one. That’s why even a small amount of additional work results in difficulties related to rescheduling or combining both projects and so on.
 
Taking into consideration such situations a development company often has to include in the price risks associated with possible changes and additional time for tasks planning. In any case, if there is no detailed specification it’s better to choose some alternative.
 
Thus, Fixed Price model won’t be a good solution for projects with no clear technical specification or with the possibility of any changes.

 

Time and Material

 

Time and Material pricing model means hourly wages of hired specialists according to “you pay as we go” principle. The estimation of the scope of work, project scale, completion deadline is carrying out, but the approximate one as TM implies changes, and the main point there is a final result and its quality. Not price and deadlines developers must meet. It defines benefits of Time and Material pricing model over the other ones (in particular, Fixed Price).
 
There are no contract with price and timeline you are to strictly follow, as any changes in specification will definitely lead to contract changes and costs increase. Also Time and Material doesn’t have such strict deadlines as the main point there is a result-oriented approach.
 
So, there is no pressure on developers as we have working on Fixed Price model. Their motivation to find the best solution in all tasks raises. Communication goes easily and freely: specialists can advise customer the most optimal options, provide recommendations (say, for example, that it’s more reasonable to spend more time on some task and receive a high-quality result) without worrying about changes in the scope of work and so on.

 
When Time and Material will be an effective solution:

  • client’s requirements to product as well as his company’s customers (the target audience) can change during the development process:
  • the scope of the work can change;
  • a client doesn’t have a detailed specification (or it’s just difficult to provide it).

Thus, a result-oriented approach (this model practically always gives a better product), readiness for changes, working process flexibility, and communication transparency define Time and Material.

 

Fixed Budget
 

A good alternative to Time and Material and Fixed Price. Fixed Budget advantages include the fact that a client defines his budget and priorities providing developers with maximum detailed specification. Based on received information they say what is possible to do for the indicated price and when the result will be made.
 
Fixed Budget will be the best solution for the development of product with minimum functionality (minimum viable product – MVP). The main point of MVP is the fastest application launch saving money and resources. What does it mean: the main functions are defined, time is indicated (our MVP development process takes 2 months), then QA and stabilization are carried out (about one month). Thus, a client has a warranty that he will quickly receive a high-quality application having the opportunity to develop it later making improvements and implementing new features (if required). Fixed Budget pricing model is very effective when it’s necessary to launch the app as soon as possible.
 
It should be noted that the scope of work can vary depending on priorities setting by the client.
 
So, the main Fixed Budget advantages include the fact that a client always knows for sure when he will receive the result, its price, and also recommendations offered by developers (how to make the best product taking into account time and budget).
 
Now you know which pricing models exist and which pros and cons they have. Often companies have got used to work with a certain payment method, but for some projects it’s more reasonable to find an alternative. And we are always here to help you make the right decision.
 

Time and Material, Fixed Price, Fixed Budget: benefits, risks and limitations
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