Time + Materials or Fixed Price —Which settlement model to select?

Time + Materials or Fixed Price —Which settlement model to select?


Our interactive studio—FROGRIOT—executes designs in two settlement models. We often discuss with clients which model is more favorable for them. Such debates are so frequent that I have decided to dispel certain myths surrounding those two settlement models. Simultaneously, I would like to specify when it is worth to use a given model.

The Fixed Price Model

Fixed: The scope of works, budget.

Variables: Quality.

The initial assumption: All the time estimations are correct and they will not require any changes within the course of the design execution (namely, the design is perfectly detailed out).

The risk: The contractor bears the risk, which means that the quality may decrease if estimates are not precise.

Flexibility: Every single change is a matter for a debate. It is assessed whether it falls within the scope of works assumed before the design was launched. New ideas are seldom introduced.

Use: This settlement model is dedicated first of all to small /simple websites, simple applications, and landings.

 

The main assumption of the Fixed Price settlement model is to maintain the budget of the design at a level determined in advance. This model enjoys unwavering popularity, as it (seemingly) guarantees the clients with financial security, as they know the price in advance. Why only seemingly? I will explain it in a minute. First, I would like to dwell a little on the application of this model.

An ideal case to use the settlement on the basis of the Fixed Price model refers to the situation when all the functionalities, the manner of implementation and execution particulars are given in detail to the greatest extent. Thus, a reliable schedule is developed on the basis of which the price may be estimated. The problem, however, is that it is very difficult in real life. Substantially, it is not possible to estimate costs of the design ideally. Basing on my experience, I must say that I have not seen many specifications prepared well enough to determine the price of the design with the accuracy up to one working hour. This difficulty is implicated by the fact that each creator operating in the Fixed Price model evaluates in fact something else. Each creator is basing on their own skills and approach to designing. Then, there is plenty of space left for interpretation.

As a matter of fact, the model supposedly programmed for the financial risk elimination is only transferring that risk to other fields. Establishing a fixed price, we risk inflexibility. At the moment of signing the contract, the final shape of the design depends on the contractor. The less precise the specification is, the bigger risk of improper quality of performance occurs. Additionally, each attempt to amend the scope of the design (e.g. to introduce any new concept, which always appear in the process of creating the design) entails additional costs, not considered in the original quotation. Consequently, the lack of flexibility leads to creation of the product failing to meet the requirements of the customer or simply worse than it could be.

The other type of the risk —this time hidden in the price—refers to the fact that the company executing an order in this model, will add certain margin to the quotation. This margin is related to the fear against extra costs of the design due to changes or unforeseen situations. Such margin may amount even to 80% of the base price. Consequently, this causes that the design may become simply overpaid and more expensive than the one conducted in the Time + Materials model where you pay only for actually conducted work.

 

The Time + Materials Model

Fixed: Quality.

Variable: Budget, deadline, scope of works.

The initial assumption: The most important aspect is to conduct the scope of works with variable assumptions concerning the cost of such works (they often stem from impossibility to define all the functionalities or dynamically changing guidelines).

The risk: The client bears the risk.

Flexibility: A full flexibility—the entirety of works is subjected to the supreme goal of delivering the best product.

Use: Software (including saas), extensive websites, applications.

 

The main assumption in case of selecting this model of settlement refers to the delivery of the best possible quality product. The above mentioned is related to reacting dynamically to received new information as well as changing design considerations. In this case, the Time + Materials model proves the best. From my experience, always when software, applications or web applications are involved, this type of settlement guarantees considerably better results. The possibility to focus on functionalities without a constant “struggling” between the client and the provider with regard to “what the contract stipulates” triggers a creative atmosphere. And this consequently translates into looking for the most optimal paths and solutions. Although this may not be apparent, the above mentioned atmosphere is a very important factor, exerting an influence on the design created. Anyhow, everybody shall act to achieve one, well defined objective.

Many fear the Time + Materials model, thinking that they will not manage to keep the cost within  the limits and the whole risk related to that will be transferred to the client. Obviously, there are tools which offset that risk. First of all, it is possible to estimate in advance the price range within which we operate. It will not be super precise, however, an experienced company shall be able to assess costs in a rather correct approximation.

The second tool refers to so called Cap, that is the determination of the amount, which may not be exceeded by the budget. In practical terms, during the course of the design elaboration, in the ongoing manner, we look at the design from the perspective of new functionalities in the context of the whole design. We verify whether their implementation does not exceed the assumed budget.

And speaking of cost, it is worth to mention that the design settled with regard to the hours worked (Fixed Price) refers to the risk. In the Time + Materials model there is nothing to add and there is no need for concern about extra costs. Eventually, designs conducted in this model are cheaper than those conducted in the Fixed Price model.

Summary

There is no such thing as one proper settlement model, but it is possible to specify which model is better for a given type of the design. If you implement a simpler design and you have the most precise possible specification of it (and this is easier to conduct for less complicated designs), then it is worth to work in the Fixed Price model. However, if you deal with a more complex design, and additionally you care about flexibility, and room for dynamic changes and optimization, then I would definitely recommend the Time + Materials model.

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