Fixed Cost vs Time & Materials: Which Software Contract Is Best For Your Project
For many businesses, buying an off-the-shelf software solution isn’t enough. From its lack of features or its inability to work within a preexisting workflow or iOT hardware – the rigidity of these pre-made software solutions has many businesses looking for a custom software build.
If you’re a company ready to start that custom build and have identified the perfect software development firm, don’t overlook the final step: choosing the right pricing model for the project.
Choosing a contract for your business that does not align with your business goals can have negative consequences that could hurt your business and the overall product. So, you should weigh the pros and cons of your project pricing model before settling on the one best suited for your business goals. This article will discuss the two most popular pricing models- fixed price vs. time & material – and help you determine which would be better suited for your particular custom build.
Fixed Price Contract
With a fixed-price contract, the buyer and seller agree on a total price for the entire project before any work begins. This arrangement is often used when the scope of work is well-defined and won’t change during the development. Buyers may initially gravitate to this type of contract because it provides certainty around budget and timeline – two critical factors when planning a software development project.
Pros Of A Fixed-Price Contract
Several benefits make fixed-price contracts appealing to buyers, such as:
You know exactly how much you will pay for the project upfront, so you won’t have any surprise invoices rolling in.
It can be easier to get financing for your project since the total cost is known in advance.
Since the timeline is also agreed upon upfront, buyers have the flexibility to plan for the use of the project and what resources will be available to support its rollout.
Cons Of A Fixed-Price Contract
While there are benefits to a fixed price contract for the buyer, there are also some potential drawbacks such as:
If the scope of work changes during the development (as it often does), it can lead to scope creep. Change orders are often required for anything new added beyond the agreed-upon scope. These changes can take resources and money and push the overall timeline back.
If unforeseen circumstances occur (a vendor goes out of business, an employee quits, etc.), the entire project timeline and budget can be thrown off.
The firm working on the custom software solution might be less likely to use the best resources on the project since they are getting paid a fixed amount regardless of how long it might take.
As it is difficult to estimate a whole project up front, firms often provide the higher end of an estimate in order to cover the development time. The customer may, as a result, end up paying more than the actual development time spent on the project.
Time & Materials Contract
With a time and materials contract, the buyer pays for the actual hours worked by the development team plus the cost of materials used during the project. This type of contract is often used when the scope of work is not well-defined or is subject to change during the project, which most development projects are. Buyers like this type of contract because it gives them more flexibility and control over their project overall.
Pros Of A Time & Materials Contract
Several benefits make time & materials contracts appealing to buyers, such as:
You only pay for the actual hours worked on the project so there is no wasted spend.
Since you are only paying for the work that is done, it incentivizes the development team to work efficiently and complete the project as quickly as possible.
If scope creep occurs, it is much quicker and easier to manage since the developers will be paid for the additional work.
It offers flexibility to change the scope of work as needed without penalty.
It’s less rigid than a fixed project, and you would see no overinflated pricing upfront like you might with a fixed project.
Cons Of A Time & Materials Contract
Let’s not forget that there are also some cons to the time & materials contract that the buyer should be aware of, such as:
Since you are paying for the actual hours worked, it can be challenging to predict how much the project will ultimately cost.
Scope creep can still be an issue if not managed properly since you are still paying for additional work. Managing scope creep from the beginning through the end is critical to keep the project within a reasonable cost to develop.
Which pricing model is suitable for your software development project?
The answer depends on several factors, including the scope of work, timeline, and budget. The choice will also hinge on how your business is run and what would be better for your bottom line or personal preference. For example, would you prefer to pay for the services at one time (fixed price) so you can handle the budget before the project begins? OR, are you someone who wants a time and materials contract to pay for work as it’s completed and have the flexibility to make necessary tweaks to the project as you go.
A fixed-price contract may be the best option if you have a well-defined scope of work and timeline. However, if the scope of work is subject to change or is not well-defined, a time & material contract may be a better fit. Ultimately, it’s important to weigh each type of contract’s pros and cons before deciding so that you can choose the best pricing model for your specific project.
Work With Flint Hills Group On Your Next Custom Software Project
At Flint Hills Group, our team of experienced developers can work with you to create a custom software solution that meets the specific needs of your business. We take the time to understand your business, workflow, and goals before making recommendations. The choice between a fixed cost vs. time and materials is a process that we work through with each of our clients and decide beforehand what is best for the overall project goals.
We want to ensure that everything we put in front of our clients is something they are both proud of and confident in. Our goal is to be as transparent as possible with our custom software solutions and work with our customers to find the best pricing model that aligns with their goals. Get an estimate for your project today!
Julie Simpson is a freelance writer, SEO consultant and technology enthusiast from Lucedale, Mississippi. When not writing articles and updating websites, she can be found working on her 7-acre farm with her husband, daughters, and assortment of plants, chickens, dogs, cats, and sheep.
Julie Simpson Technology Enthusiast
Julie Simpson is a freelance writer. SEO consultant and technology enthusiast from Lucedale, Mississippi. When not writing articles and updating websites, she can be found working on her 7-acre farm with her husband, daughters, and assortment of plants, chickens, dogs, cats, and sheep.