The Pros and Cons of Fixed Price vs Time and Material Contracts in Software Development Outsourcing

Software development projects are notorious for going over-budget. As you kick off yours, pay close attention to the type of contract you set up. 

Often project success hinges on choosing the pricing model that meets your needs. Without it, your business may face a bloated budget, endless scope creep or a flawed product.

Typically, there are two main models: time and material vs. fixed price contracts. Let’s analyze the risks and opportunities of both these models. This way, you can better control your outsourcing costs while achieving your product vision. 

What Is a Fixed Price Contract and How Does It Work?

A fixed price contract involves a flat fee to complete a well-defined project. In this model, it’s common to spend lots of time upfront clarifying the scope. The project is usually small and straightforward. For this reason, your participation isn’t typically required during the development process.

Unlike time and material contracts, you will only pay once the final product is ready. Overall, you must be certain about your project vision from the start. Any changes or additions will incur higher costs and delays.

When to Choose a Fixed Fee?

Deciding between fixed price model vs. time and material contracts can be difficult. Here are some best use cases for fixed price projects:

• Your project is small, such as an MVP. 
• You have a clear vision and known requirements. 
• You don’t anticipate any changes or pivots to the project. 
• You feel comfortable handing over the project control to your provider. 
• You’re not too concerned about the product’s time-to-market.  
• You’re keen to lower your financial risk with a flat fee. 

In these cases, you may benefit from selecting a fixed price contract for your product.

Pros and Cons of the Fixed Fee

Of course, fixed fees aren’t advantageous in every scenario. There are serious risks to know before opting for a fixed price model vs. time and material contract.

Advantages of Fixed Price Contracts

• Clear, secure pricing. With fixed fees, you’ll know the final total cost upfront. You won’t have to track expenses or feel uncertain about your budget. 
• Minimal management required. You’ll hand off control to your provider during development. After the contract is defined, you’ll have minimal participation until final delivery.

Disadvantages of Fixed Price Contracts

• Upfront negotiations can be lengthy. Since the price is based on your scope, you’ll need an airtight contract. This can take time to ensure all details are pinned down. 
• Little room for error. If your scope isn’t well-defined, you risk having extra fees for changes and additions. Any unexpected obstacles will also take you over-budget. 
• Less control over the quality. Your provider is in charge of meeting quality. You won’t know if the product meets your standards and requirements until it’s completed. 
• Time-to-market can vary. Since you’re paying for the final product, the project duration will depend on your provider. 
• Doesn’t fit well with high-complexity projects. For projects with hard-to-determine requirements, fixed fee contracts aren’t ideal. 

What Is Time and Materials Pricing and How Does It Work?

Time and materials (T&M) pricing takes a different approach. You'll be charged by hours worked on your project (i.e. time). You'll also be responsible for the cost of tools and equipment (i.e. materials).

In the contract, you’ll define the hourly rates and the full list of materials required for the project. From here, you’ll pay as you go for work completed. Since you’re charged by the hour, you’ll have the full flexibility to update your project scope over time.

The time and materials model is ideal for larger projects with multiple phases. You can revise requirements, make additions and prioritize features as you go along. In a time and material contract vs. fixed price, you’ll also have space to make any needed improvements.

Given the complex nature of these projects, you’ll be consulted often. It's common for businesses to provide feedback and clarify priorities throughout development.

When to Choose Time and Materials?

The T&M pricing strategy is often the industry standard for building a complex product. When choosing time and material vs. fixed price contracts, keep in mind these best use cases.

• Your project is long-term and large in scope. 
• You have dynamic, complex project requirements.
• You require full flexibility to make changes and update priorities. 
• You want to maintain a level of oversight of the project. 
• You’re not certain of the project’s duration, as you may scale up new phases. 
• You’re interested in gaining cost savings from paying for actual completed work.

As you can see, time and materials pricing is well-suited to projects that may evolve over time.

Pros and Cons of Time and Materials Pricing

Understanding the pros and cons of time and material vs. fixed price contracts is key. Let’s take a closer look at the reasons why you should (or shouldn’t) opt for T&M.

Advantages of Time and Materials Contracts

• 100% control over project direction. You’ll have direct contact with developers and be highly involved in the process. For example, you may offer feedback, direction, priorities, etc.
• Scaling changes and additions is simple. You have the flexibility to update your scope and scale up new features or changes as needed.
• Quality is in your hands. You’ll achieve a better final product by giving feedback and checking quality often.
• Get started faster. You don’t need to define all the details to get started. If necessary, you can kick off your project quickly and adjust the scope as you go along. 
• Budgeting is easy. You’ll get full transparency into your budget with regular reports. These include developer hours, materials purchased, milestones completed, etc.
• Limit risks with a not-to-exceed cap. Some providers will let you set a cap on your spending to guarantee you don’t go over-budget.
• Good for projects of all shapes and sizes. No matter your project size, T&M contracts offer maximum flexibility. 

Disadvantages of Time and Material Contracts

• Low risk of going over-budget. If you make changes and expand the scope often, you may spend more than anticipated. Even so, T&M is great for getting transparency into your budget on an ongoing basis.
• Constant management required. You’ll need to take a leading role in management. Track your budget, key milestones and more to ensure your project is on track.
• Project duration may be hard to pin down. Sometimes the duration of larger projects can be difficult to predict. Ask your provider to provide a timeline to set an estimated product launch. 

Fixed Fee vs. Time and Materials: What’s the Difference?

Fixed Price

Type of Project

Small size, such as an MVP

Scope

Clear vision and known requirements

Flexibility

Rigid, with no changes or pivots to the project

Quality

No in-house control over quality 

Oversight

Minimal management, with control handed off to provider

Speed & Duration

Slow to kick-off due to contract negotiations; duration may vary

Cost Savings

Flat fee offers security, but perhaps not savings if you expand the project scope

Risks

• High risk of over-budget if scope isn’t well-defined
• Risk of low quality, since provider is in charge

Time and Materials

Type of Project

Any size, though best for long-term and large projects

Scope

Dynamic, complex project requirements

Flexibility

100% flexibility to make changes and update priorities

Quality

Full control over quality through review and feedback

Oversight

Highly involved management, with regular meetings and feedback

Speed & Duration

Fast to kick-off; duration may vary if phases are added

Cost Savings

• Paying for actual completed work can reduce costs as your project evolves
• Budgeting is also simplified

Risks

• Low risk of over-budget if requirements expand significantly
• Risk of low quality if you don’t undergo top project management

Time and material vs. fixed price contracts have unique focuses and benefits. As you select a pricing model, get to know these two models with our in-depth comparison analysis. 

Deciding Between Time and Material vs. Fixed Price

Both pricing models offer advantages, depending on your project scope. If you’re still choosing between a time and material contract vs. fixed price, bear in mind these key areas. 

1. Flexibility

If you require flexibility to make changes and additions, T&M is your best bet. You’ll have full range to update your scope and set priorities for your project. In contrast, fixed price is very rigid, with little room to pivot. 

2. Quality 

For control over your project quality, choose T&M. You’ll have the opportunity to review and make changes. Fixed price puts quality in the hands of your provider, so there’s some risk involved.

3. Oversight

If you're keen to oversee the project and ensure on-track progress, budget and product quality, T&M is the way to go. This way, you’ll be highly involved in the management, with regular meetings and feedback. Fixed price gives you minimal space to control the project during development. 

4. Speed and Duration

Duration varies widely depending on your project scope. For a fast kick-off to your project, go for a T&M contract. You can scale up phases over time, though your project can get lengthy if you keep adding features. 

In comparison, fixed fees are typically slow to kick-off due to contract negotiations. Yet, time-to-market can be quick since the project is usually smaller in scope.

5. Cost Savings

Cost savings are contingent on using the right pricing model for your needs. If you’re looking for a secure final cost, a fixed price contract is the best choice. However, if you expand the project scope, a flat fee contract can become bloated with extra costs. 

That’s why T&M is ideal for complex projects with evolving requirements. Ultimately, you’ll save by paying for actual completed work. Budgeting is also simplified with this model, making it easy to control costs over time.

6. Risk Liability

Each pricing model has its unique risks. For fixed pricing, the greatest risk is going over-budget if you need to make changes or additions. You should also keep an eye on quality, as your provider is in charge of meeting standards. 

For T&M, there’s a low risk of going over-budget if requirements expand or the scope changes significantly. You’ll also need to have top project management in place to guarantee best results.

Navigate Fixed Price vs. Time and Material Contracts With Us

Your pricing model can make or break project success. Make the right choice by understanding time and material vs. fixed price contracts. Check out our best use cases, pros/cons and comparison analysis above to stay informed. 

In addition, keep your costs in check by finding a top software outsourcing partner. At Netcorp, we provide transparent, high-caliber partnership for projects of all sizes. Reach out to our team to get an honest cost estimate for your product vision.