Time-and-Materials vs Fixed Price vs Milestone pricing models | Lanars
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Time-and-Materials vs Fixed Price vs Milestone pricing models | Lanars

Mariia Lozhka
IT Researcher, LANARS, 02.04.2019 322

Time-and-Materials vs Fixed Price vs Milestone pricing models | Lanars

Mariia Lozhka
IT Researcher, LANARS, 02.04.2019 322

Both customer and company are interested in choosing the beneficial type of pricing model. Over the broad experience on the market, we’ve figured out three types of pricing contracts for IT projects. There are time and material pricing, fixed price project and milestone contract. Let’s agree that all of the projects differ. Different types of contracts suit different projects. We want to share with you our experience in this article. Keep reading to discover the best pricing model for your project. 

 

Fixed price contract

You will be surprised, that it's possible to fix the price of the project. Keep reading to figure out how price can be fixed. Fixed price model implies estimation of the particular project and amount of work to be done, based on customer requirements. Depending on the amount of work, the company calculates custom software development services  hours required to complete all the tasks. So, the project scope is written before the development starts and has strict deadlines.

 

After the estimation, the company sets the price for the project. This price is fixed and can be paid partially, or one time. A fixed scope may seem inconvenient, but don’t worry. Actually, some changes are possible. Although the fixed scope, it may turn out that some vital features are missing. The development company will implement them, but keep in mind, that it’ll increase the cost and time of development. Based on the above, let’s define fixed price contract pros and cons.

 

pros

cons

Settled cost. A customer can plan expense. The price is final and unchangeable, that is good for customer wallet. Fixed price project prevents extra fees.

Not flexible. The project scope includes all the features, predefined at the planning stage. Changes are not welcome.

 

 

Harsh timeline. The project delivered on time.

Long planning stage. Customer spends up to three weeks on this stage to define all the specific features and amount of work.

Simple management. Project scope negotiated before the development starts. So all the details are included in advance. Development team clearly understands the tasks, so control is simple and takes little time.

Miscommunication. Since the project flow is written beforehand, there is a risk of miscommunication. Some features may turn out to be defined not correctly or even missed. As a result, the customer may receive not what he\she wants.

Expected result. The result is negotiated and put into the scope up front.

Risks. Client risks are minimal, while company risks are high because a customer wouldn’t pay for extra development hours in case they’re needed.

When to use a fixed price contract:

Despite all the fixed price contracts pros and cons, this model is suitable for the following projects:

  • First of all short-term projects with several essential features.

  • The next option is MVP (minimum valuable product). If you build MVP application with a limited budget and need basic features at first.

  • Time limits are one more reason to choose a fixed price contract because it implies fixed time too.

  • If the project is well-specified in advance and you don’t need any changes in scope.

If you’ve identified your project in four types of projects above, then you’re the lucky one! Contact us to figure out the fixed price for your project.

fixed price contract

Time and material contract

Time and material contract in contrast to a fixed cost contract has a more flexible schedule and budget. Keep reading to find out the top four advantages of time and material contract. Time and material pricing formula implies established payments for development time. Customer pays for actual hours spent on development and for the completed amount of work.  A customer and a company negotiate rate per hour.

 

Payments are usually interval: daily, weekly, monthly, etc. Project timeline and budget are estimated approximately for time and material pricing model. This model is flexible, and changes are welcome, but it’s not fixed in time and budget. The customer is fully immersed in the process at all stages because it's an ongoing collaboration throughout all phases of a project. Let’s dig into dipper and highlight time and material pricing formula advantages and disadvantages.

 

advantages

disadvantages

Instant beginning. The development stars immediately and customer doesn’t need to consider all the details of the project.

Unfixed budget. The budget is approximate, so until the release day customer doesn’t know the final cost.

Hourly rates. Customer pays for actual development hours, so avoids overpaying.

Undefined timeline. Deadlines are approximate, and a variety of factors may influence the length of development — a danger to delay the project.

Flexibility. It’s not a problem to change the scope with time and materials model. A customer has a chance to adjust the direction of product development, based on feedback from their end users instantly.

Accurate management. Customer saves time in the beginning, but decisions have to be made, but during product development, the customer is involved in a process. Daily routines, such as daily planning, reports, and meetings take a lot of time.

Risks. Company risks are minimal, while customer risks are high because a customer has to pay for extra development hours in case they’re required.

 

When to use time and material contract

Now is the most exciting part - types of projects for the time and materials model:

  • Long-term projects. Preparing specifications in advance for them is impossible. They need to be flexible to make changes and add features in the future.

  • It’s not easy to create specs for complex projects too. Something is always will be missing, so it’s better to choose a time and materials billing model.

If you have a limited budget but need a long-term or a complex project, then we have a solution for you. Time  & materials contract with a cap! It's a subtype of time and materials billing model that includes a budget limit. A customer and a company set budget maximum, so the final cost will not exceed the maximum. It helps to plan expenses more carefully.

Time and material contract

Milestone contract

Milestone contract includes regular payments for accomplished milestones. Customer and development team set benchmarks together. As a rule, a customer pays, at fixed points, when the required tasks completed. Payment is determined by time spent on development and amount of work. A customer pays for actual work done. Trusted relationships between a customer and a company are preferable, in case of arising disputes.

Isn’t it fantastic? But there are some minuses. Read the following ups and downs of a milestone contract:

 

ups

downs

Charging for a result. Payments are provided for an achieved result. A customer avoids a one-time balloon payment.

Unforeseen budget. The budget is approximate, so until the release day customer doesn’t know the final cost.

Results management. A customer approves completed work and progress.

Undefined timeline. Deadlines are approximate, so here comes a danger to delay the project.

Satisfying results. A team is motivated to reach the next milestone and to show excellent results to receive a new payment.

Risks. This type of contract implies medium risks both for a customer and a company. If extra development hours will be required, then it’s not a problem to negotiate a reasonable price.

 

When to use milestone contract

This is the most useful part for you - when to choose milestone billing:

  • Long-term projects with complex scope, which usually are building gradually.

  • If it’s not your first project with the company and you have trusted relationships, then a milestone contract is a good option.

  • If the quality above all for you, then milestone billing is what you need. You’ll have an opportunity to check if everything is perfect before charging.

milestone contract

Fixed price agreement vs. time and material contract vs. milestone contract pros and cons:

The best billing model is the one that meets your expectations. We’ve prepared for you this simple comparative table of time and materials vs. fixed price vs. milestone contracts. This table will help you to determine what you expect from your project and to choose the best billing model.

 

 
 

Fixed price contract

Time&materials contract

Milestone contract

Start

takes a lot of time for planning

simple and quick

quick

Cost

defined and fixed

approximate and unfixed

approximate and unfixed

Deadlines

defined and fixed

approximate and unfixed

approximate and unfixed

Charging

after release or partially

after each sprint

after each milestone

Financial risks

low

high

medium

Management

poor management

fully immersed

fully immersed

Flexibility

nonflexible

very flexible

flexible

Testing

nonproper

proper

proper

Project types

simple and short

long-term and complex

long-term and complex

 

Conclusion

Let’s sum up. The most common pricing models are fixed price contract, time&materials contract and milestone contract. Each of them has advantages and disadvantages and are suitable for different projects.

  • A short and simple project = fixed price contract.

  • Long-term and complex project = time&materials contract\milestone contract.

  • Flexible and high quality = time&materials contract\milestone contract.

If you have any further questions or want to discuss your project, feel free to contact us.

 

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