Usually before starting a software project, both clients and contractors should decide upon whether it will be a Time & Material pricing contract, or a Fixed Price contract. In order to choose the correct type of contract, let’s review the differences between the two software development pricing models.
| Time & Material | Fixed Price | |
| Project Scope | Flexible | Fixed |
| Estimate & Timeline | Approximate | Defined |
| Client Participation | Significant | Little |
| Emergency Situations Integration | Easy | Hard |
| Budget | Depends on the hours spent | Fixed |
In Time & Material pricing contracts, the project scope is flexible and can be changed during the contract, without changing the contract itself.
Fixed Price contracts do not permit such changes in the scope. The scope is set before starting the implementation of the project, and a change in the project scope requires a modification of the contract.
As the project size grows, the project scope is harder to control and define, which means that for medium and large projects a Fixed Price contract will result in increased analysis cost.
In reality only a few clients have a clear understanding of the product they need at the very beginning. After the project starts a client’s business perception is often changing in order to match better the business needs, which means that the project scope needs to change in order to accommodate these needs. A Time & Material contract allows this kind of changes.
The estimate and timeline component is approached very different in each type of contract.
Time & Material contracts have an approximate estimate and timeline defined, in order for the customer to have a general idea of how the project will evolve in time based on the initial scope. Due to the fact that the scope may change at any point in the contract, also the estimate and timeline will change accordingly. Even if the estimate and timeline changes, the client is informed during these changes of the newly approximate estimate and timeline.
Fixed price contracts have a clear estimate and timeline agreed between the client and the contractor. This estimate and timeline will not change if there is no additional agreement added to the contract. Also, in order to have such an exact estimate and timeline, the analysis effort will have to be increased.
In a Time & Material contract, the customer should be reachable by the contractor in order to clarify all the aspects of current tasks. This means that the client will be in touch with the development team all the time during project development. It also allows him to stay in touch with the changes and see if something should be modified from time. Keep in mind that cost of changing a specific feature in a software project is growing if discovered later.
In Fixed price contracts, the customer will clarify the entire project scope upfront in the analysis phase and then he should be reachable for some questions, but these questions should not have an impact on the project scope.
In case of an emergency situation, the customer probably won't have time to go through a negotiation process for that effort, as they need someone in there today. Time & Material contracts allow easy integration of emergency situations in the terms of existing contract.
In case of a Fixed Price contract, the customer and contractor will have to sign additional documentation to existing contract in order to accommodate such situations.
In a Time & Material contract when the contractor bills by the hour with expenses, he is ensured of being paid for the time spent, regardless of how long the project takes. The client has the freedom to change the specifications of the project, or to add new components, as it is understood that such changes will incur more time on the project, and hence a higher invoice.
Fixed price contracts assume that the total budget on the project is approved before development starts and remains unchanged. The customer does not have the possibility to change requirements of the project in the terms of a Fixed Price contract.