When you are ready to engage a software company, you’ll need to agree a commercial arrangement with them. I’m going to explain why we think working on a time and material basis with your software development partner is a good idea.
We have worked with many businesses that started off believing that fixed price is safer and the outcome more reliable. However, we have shown over time that, in fact, time and material is a better choice for most projects.
What is fixed price?
A fixed price arrangement is very much as it sounds. Your development partner will present a price to you that includes all the time they estimate is required to complete your project. To do this, they will need a very detailed specification, visual design and technical design for the product.
- You know exactly what you are going to get
- The price will not change
- If it’s not in the spec, you won’t get it, so beware of ambiguity
- No changing your mind, you can only have what has been priced
- You have to know EXACTLY what you want, before you can even engage a developer
- The price will include the additional time it takes to come up with the estimate
What is time and material?
If you choose to go down the time and material route, you will only pay for time spent. Your development partner will give you an idea of the cost up front and then begin work based on this budget. They will charge you for the time they spend on the project and so should report back to you regularly on their use of the proposed budget.
- The end product will be better because you are able to be flexible during development
- The process is faster, because your developer doesn’t need to spend time up front creating the estimate
- You will avoid hidden “contingency” charges, added by the developer to protect against the fact that their estimates may be inaccurate
- You will not know the exact price of the project up front
Why is time and material better?
You can be flexible
When you are embarking on a new software development project, you are unlikely to know the exact scope of every individual feature within the product. This doesn’t mean you cannot begin work. The agile design and methodology helps a team work from the top down. Scoping your project in small chunks means work can begin without knowing every detail and you can fill them in as you go.
This level of flexibility means you can change, remove or add features as the development of your product progresses. This scope change might be the result of user testing, business circumstances or budget.
You will prioritise
Budget is a great way to control your project. In a fixed price project you will add every single feature you can think of, so that you can get a comprehensive price. In actual fact you won’t need or want those features straight away, and it could take months to scope them out enough to be able to provide a price.
Using the time and material model, you will inevitably start with the features that are most important to you and that will deliver the greatest value, because those are the ones you want to see in action. Focussing in this way means you can decide, at any time during the project, when you’d like to stop and do a release. Instead of having to complete all of the scoped development before you can evaluate.
We can start sooner
For a fixed price project, your development partner will need to spend time working with you on a specification. This specification has to be detailed enough to allow for an estimate and must be comprehensive enough to avoid assumptions and ambiguities. Depending on the size of your project, it could take weeks or even months to document.
Working on time and material basis, you only needs to document enough to be able to start work. This means your design and development will start much sooner and you will see results quicker.
We will deliver faster
It seems fairly obvious by now; you’ve prioritised only the most important features, and started quicker, so unsurprisingly you’ll finish sooner.
However, you’ll also find the rate of work increases, as your software company is able to proceed with the work in smaller chunks. This means you’ll see updates of completed software, more regularly, and you’ll have more insight into the process involved in delivering that software.
You will save money
It is almost impossible to know every detail of how a piece of software is going to be delivered up front. To cover themselves financially, your development partner is likely to include “contingency” in your project. This means that they will increase the price for anything they feel is unknown, to ensure they don’t lose money during development.
If you are working on a time and materials basis, you will only pay for the time spent, no extras or hidden surcharges.
Time and material reduces risk
When you have a fixed price relationship with your software partner, they have no reason to be transparent about their process. They are given a completed specification and design, and will develop the software and then deliver it to you. This creates a risk that you don’t know what they are doing or how.
The fast-paced and flexible format of time and materials development means that a development company is forced to expose their process to you, as you will be much more heavily involved in the day-to-day delivery of the product.
Common Misconceptions about Fixed Price Work
If you have a hard deadline, fixed price is better
You may read or hear, that working on a fixed price basis means you are more likely to achieve a deadline. In actual fact, we have seen the reverse to be true. It is more than likely your developer will underestimate the time required, so they will miss deadlines. This can have a critical impact on your business. Using the time and material approach, you can begin earlier and prioritise better, so deliver faster.
If you have a limited budget, fixed price is better
Businesses often choose fixed price as the best way to use a limited budget. But, If you have a limited budget, the last thing you want to do is waste it on finding out how much each feature will cost. Spending valuable budget to work out estimates, simply isn’t cost effective. Once you’ve estimated, you may well have to remove features to get the project under budget. This of course, wastes more budget. Instead, if you work closely with your developer and prioritise well, you will get a usable product within your budget.
Which to choose for your project?
It’s important to remember, time and material doesn’t mean “blank cheque”, it means that your software development company is not put under undue pressure to deliver and stick to an estimate. Instead, they can focus on managing your budget, and creating the best possible product within that.
Hopefully this article has given you some insight into the differences between a fixed price and time and material approach. But if you are still not clear about which approach would suit you best, fill in your details below to download our checklist and find out which you should choose for your project.