Is it better to pay on a “Time and Material” or a “Fixed Price” basis?

Budgeting is at the top of the list of the pain points of every new project.

And it makes sense.

Even when a rich budget is precisely allocated to your web development project, and even when the specs are set in stone, you still obviously want the best bang for your buck and make sure you don’t overpay.

After contacting a few agencies you’ll find out that some suggest working on a “Time and Material” model (billing you periodically for the hours worked; for example, up to the end of the month), while others are happy to provide you with a “Fixed Price” model (proposing in advance a price for the completed project, based on your specifications brief).
So, which one is better between the Fixed Price model and the Time and Material model?

Time and Material

The advantages of the T&M model are related to how a project goes in reality rather than how a project should go in theory. Projects (big and small) usually come with surprises, and the best way to deal with them is to be able to change and adapt.

At the beginning of the project, your agency will still give you a ballpark figure that you can show to the finance team, based on the initial specs.

When Time and Material is a good choice: 

  • Your specification documents is “open” and flexible, not detailed to the micron;
  • You want to release your new development early and often (DevOps approach),test and give feedback, encourage improvements;
  • You want the lowest hourly rate possible;

In practice

Let’s look at how T&M delivers in terms of:

  • Speed
    Time and material billing allows faster delivery. This can be counter-intuitive but, for example, having more flexible specs means that works can start earlier, as some things can be decided or changed later on without having to go through a lengthy approval process of a bulky document. Faster/better solutions can be found and adopted along the way.
  • Quality
    If new technologies, extensions, etc are discovered after the project has started (or your product/distributor/business model changes), you and your agency will have less barriers to discuss them and adopt new best practices along the way. The final result will fit your needs according to the needs evolution, and not the needs set in stone even before starting the project development.
  • Cost
    Billing on a T&M basis might imply lower hourly rates than Fixed Price billing, as the Agency will not have to add a margin to act as a buffer for the unknown.
    For this reason, we think that Time and Material is better from this point of view too.

Fixed Price

Choosing the Fixed Price Model you will receive an exact price for the project, at the very beginning. In theory, you would expect that clear and detailed specs should allow to precisely forecast costs and deadlines. Having the ability to prepare very good project documentation, and sticking to it, might allow that.

You will be able to compare very detailed quotes.

Advantages

  • You will see a clear deadline;
  • Once the specs document is done, you should be relatively uninvolved other than testing.
  • In case you don’t consider any further changes, you can allocate a precise budget to the project. 

In practice

Let’s look at the bigger picture now:

  • Speed
    Preparing detailed specs takes time. And, if the project is not a short one (say 6+ months long), it is very likely that something might change along the say. The specs document will need to be re-worked, slowing things down.
  • Quality
    Fixed Quote Projects will still include updates, specs clarifications, testing, etc… but, once things are signed off, there will be a strong motivation to stick to the agreed budget and timeframe. The final result will still be of good quality, but if a better way emerges along the way there might be resistance in adopting it.
  • Cost
    Your agency will still have to expect the unexpected… to do so, they simply charge more on a per-hour basis when they calculate your quote, to accommodate for the changes that will very likely be required, regardless of the initial intentions. In the unlikely case that changes will not be needed, or a project is delivered earlier than forecasted, they will still keep the difference. This could mean that the same result might have cost less on a Time and Material basis.

Conclusions

Time and Material might look like the option offered by less reliable and less competent agencies that don’t know how long something takes to do, or that don’t want to commit.

In reality, T&M is often proposed by agencies that have delivered enough projects to know that every case is different and that nowadays, in any business vertical, eCommerce is an ongoing, constantly evolving project and not something that starts and finishes like building a bricks-and-mortar shop.

Surely, the fixed price model has its advantages, the main being that it gives an apparent initial clarity of timeframes and costs, which you might need to get your project approved (especially if you work with tenders). 

At Advox we still work on a Fixed Price basis if required.

Nevertheless, T&M projects always come with a general timeframe estimation, so we believe it still gives enough clarity.

We believe that agencies that push for a Time and Material billing model have an edge over the others. Surely this element should be taken into consideration together with the quality of the communication, the portfolio, the certifications of each agency you contact.

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