Software Development Agreements: Time and Materials vs Fixed Price

May 24, 2022 • 255 Views • 12 min read

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Bohdan Vasylkiv

CEO & Co-Founder

Today we are going to talk about a very important issue - software development agreements. The main purpose of this article is to make it clear what types of these arrangements are and how to choose the right one.

In fact, we have two completely different types of contracts: the time and materials vs fixed price one. Obviously, the decision about which one should be used is made at the stage when software development time estimation is happening. It is one of the first steps in the app development process.

Software development time estimation is performed in order to plan everything that is related to the app development processes. For example, needed time and resources, the scale of the work, tools, and software which will be used, app cost, etc. In other words, it is a preparation stage. One of the most important decisions to make at this point along with thinking, calculation, and analysis is to choose the type of software development agreement. So what do you have to consider?

Basically, there are only 2 different types of agreements. Both of them have their own pros and cons and what is more important - define the way the development process will look like.

What Is Fixed Price Contract?

As the name implies, fixed price contract means that the software development agreement is predetermined. Usually, it exists as a one-time payment. So, to make the fixed price contract possible, the developer, as well as the customer, should agree on all the features and functions to be created.

Actually, the fixed price contract is a very regular type of software development agreement. Its main issue is that almost everything depends on the contract. So, the customer sets all the parameters for the developers, such as the scope of work and deadlines. The development team has to do everything according to the contact.

On the flip side, there are a lot of limitations that can affect the pace of development. For example, if there are additional needs such as a change of deadline or some extra resources - the new contract must be signed before.

As a result, the development will be stopped until the sides agree on the new terms. Moreover, development, based on fixed price contracts is very rigid. There may appear a lot of additional useful features that cannot be implemented without additional bureaucratic procedures.

The Advantages of Fixed Price Contract

In fact, the fixed price contract is ideal for small app development and MVPs. The fixed price allows for decreasing the app cost. Obviously, it is a great pricing model for small projects with predetermined features.

This approach simplifies app development tracking and helps to improve the communication between the customer and developer. At the software development time estimation moment both sides create the roadmap to track the deadline system. As a great bonus, the fixed price contract has a one-time payment strategy, meaning that there will be no additional payments during the development, so the app cost won’t be changed.

It is a great choice for projects, that have a limited amount of time for implementation. Moreover, it saves resources and money. It is more predictable and easy to monitor.

The Fixed Price Contract Drawbacks

Nevertheless, this approach is not flexible at all. So, if the new ideas appear or the vision of the project will change - the development will be stopped until new agreements will be reached. This means, that there is no way to add new features or make corrections and changes without any impact on the timeline and the budget.

This is why fixed price contract is a bad decision for complex or difficult projects. Of course, the bigger task is - the more problems will appear. According to the foregoing, each issue can cause a delay in the timeline and change the app cost, because each additional process must be agreed upon before being done. Also, during the development of a large project new alternative solutions and features will appear. Nevertheless, they will be rejected or will take a lot of time for considering.

What Is a Time and Materials Contract?

It is the opposite of the fixed price contract approach. Its main feature is full flexibility. In this case, the customer pays the development team for the time and resources they have used. So, at the planning and estimation stage, both sides only shape the main points of how the final product must look and agrees on the major features that must be embodied. Other aspects of the work can be changed at any time if the developer decides to.

The time and materials approach allows adding, changing, and removing features at any time as well. So, if a new idea will appear it can be added immediately, without additional contracts and agreements.

In fact, the time and materials approach is a great choice for massive projects or the ones, that require a more creative and variable approach. Moreover, its flexibility easily deals with different issues that can occur regardless of the executor and the customer. For example, software updates or changes are not a big problem. In fact, the time and materials model has no strict deadlines, so the development team can freely adjust the project to new environmental conditions.

The Advantages of Time and Materials Contract

As it was said before, the main advantage of this model is flexibility. Thanks to it, the development conditions, as well as its goals, can be changed easily. It allows making even major changes such as the direction and the purposes of the end-product. Flexibility also allows the implementation of additional features that were not considered at the beginning.

Moreover, using the time and materials approach allows the customer to better understand the processes being done as well as total development progress. It helps to understand the conditions and principles of the working strategy and to react fast if major changes take place in the market or if the target audience and its requirements for the product change as well.

Time and Materials model allows quick start and relevant solutions implementations. In fact, the developers have the main information about the project they are developing so they understood the direction of development. Even if they have an agreed required tech stack as well as major features to embody, all the small details and corrections to be made are decided by the it-specialist himself. There is no need to explain why it is a great approach and that it positively impacts the final result. Nevertheless, there are negative sides to this type of pricing model as well.

Time and Materials Drawbacks

The main disadvantage of choosing a time and materials contract is the uncertain final app cost. Of course, the approximate calculations are being done during the software development time estimation process. Nevertheless, the result of these calculations is round. It is physically unreal to take into account all the unpredicted changes and additional content and features that can appear during the development.

As a matter of fact, the main advantage (flexibility) results in the main drawback (uncertainty). Of course, there are various ways how to deal with this issue but most of them are limiting the flexibility of the development as well.

Also, such an approach requires the customer to constantly monitor the working process in order to agree and make corrections during it. In another case, the final product can vary from the customer’s expectations. This is why the client needs to track all the development and correct its direction if needed.

In this case, strict deadlines are ineffective. Setting them affects the whole development process and deprives of the most important feature - its flexibility.

Time and Materials vs Fixed Price. Which to choose?

Finally, it is time to talk about the main problem among the software development agreements: the comparison time and materials vs fixed price.

As was mentioned before, everything depends on various aspects to consider. Actually, it is not the prerogative of the client itself. As a matter of fact, the scale of the project, as well as the amount of available time, money, and other resources, are the key factors to consider. The definition of their combination along with the desired result helps to decide what to choose between time and materials vs fixed price.

What Is Fixed Price Good For?

It is a great software development agreement concept for short-term and small-scale application development when all the features, as well as the purposes, are easy to plan and embody. Also, it is a great choice if the number of available resources such as money or time is limited, or there is no need for additional functions implementation. For example, it is an ideal approach for the minimum viable product development.

What Is a Time and Materials Contract Good For?

Respectively, this model is better for long-term and large-scale application development. The flexibility of development for such projects is a great feature that enables making them more relative and adjusting them according to new conditions and purposes that may appear, or changing the tech stack if needed. Of course, the final app cost will be much bigger than the fixed one. Nevertheless, it is covered by the up-to-date updated software that was being changed during the development.

Summing all the above we may conclude that the number of factors such as the app cost, its purpose, and functionality, as well as the app development scale, is the key reason to choose between time and materials vs fixed price.

End Line

Our company will gladly help you to perform the software development time estimation and to make the right choice between time and materials vs fixed price contract. We are open to any ideas and would be glad to take part in your app development. We can not just consult you on the app development processes but to help you choose the right tech stack for your app as well as to develop it for you.

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