Fixed-Price vs Time and Materials vs Dedicated Team: What to Choose for Your Project?

When it comes to software outsourcing, the first question that clients ask is usually about the pricing model. Most vendors provide three options: a fixed-price contract, time and materials contract, and a dedicated team. All three have their pros and cons and companies usually tend to persuade you to work by the model that they are most comfortable with or the one they think fits the project best.

At SoftTeco, we work with various projects, from small and short-term ones to huge enterprise-grade projects that last for years. For this article, we combined all our experience and knowledge to explain all three pricing models in detail and provide you recommendations on the best use cases for each.

Fixed price

As the name implies, a fixed-price contract means there is a “fixed” budget that you negotiate with the development company before starting work. Here is how it goes.

You have a clear idea of your project, well-defined requirements, clear deadlines, and a certain budget. You then approach a development company, explain your request and discuss the best ways to realize it. Obviously, a company will help you “shape” the project requirements in order to reach your business goals in the most efficient manner but the majority of business decisions will be made by you. 

Needless to say, such an approach grants you a massive amount of control over the project. As well, with fixed-price projects, a vendor is responsible for the end-to-end development cycle – this is why it is recommended to start FP projects from scratch.

A fixed-price contract is best used for:

• Short-term projects that fall within a strict deadline;
• MVP development (due to its limited functionality and strict timeframes);
• When you have a detailed specification and clear requirements;
• When you don’t plan and intend any changes during the development process.

Fixed price: pros and cons

While a fixed-price contract is not the most flexible option, it still remains very popular among software development companies. 

Fixed price pros:

• The budget remains constant and there are no extra fees;
• Clear and well-defined development process and project scope;
• The management is done by the development company;
• A high level of predictability (and lower risks).

Fixed price cons:

• Expensive and rigid change management processes
• Complex risk management;
• Progress reports are scheduled with less transparency in between demos;
• A long preparation for the project is required in advance.

Time & Material

Unlike the fixed-price contract, which is suitable for the waterfall development method, Time & Material is perfect for agile projects as it provides a very high level of flexibility. By using a time and materials contract, you will be paying for time and material only: in other words, you will be paying “on demand”.

This model does not imply any fixed budget – you pay only for the requests and tasks that you make. You can use the time and materials contract either for your current project that needs a bit of adjustment or for a new project that you plan to start from scratch. The biggest advantage of T&M is its flexibility – there are no strict deadlines or requirements.

Of course, this may add a bit of vaguery to the project so it’s important to constantly communicate with the team and make sure the project remains within your desired business goals. Without effective project management and continuous monitoring, the development cost can quickly get out of hand so it is recommended to establish budget limits that you do not wish to cross.

A Time & Material model is best used for:

• Projects with multiple teams and vendors;
• Project with fluctuating requirements and scope;
• Long term support and maintenance projects;
• Technically complex projects that are difficult to estimate.

Time & Material: pros and cons

The time and materials contract is preferred by companies that follow agile methodology and are ready to provide transparent and frequent communication to the clients. Here are the biggest advantages and disadvantages of the model.

T&M pros:

• A high level of flexibility;
• Payment upon the demand (you pay only for a task requested);
• A quick and easy start;
• A high level of scalability;
• Continuous communication with the team;
• An easy implementation of necessary changes.

T&M cons:

• Low budget control;
• A high level of involvement from the client’s side;
• “First come – first serve” (you might have to wait for the team to work on your task).

Dedicated team

A dedicated team model is usually SoftTeco’s model of choice when it comes to long-term projects with complex requirements and the need to both implement changes on the go but also remain within a certain budget. When you choose a DT model, a software company provides a full team of professionals to work on your project and besides developers, the team also includes QA specialists, business analysts, designers, and project managers. 

The main thing to remember about the dedicated team is that you pay fixed fees every month, and the fee does not depend on the workload. Hence, it is important to correctly allocate the workload and ensure there is no downtime (because even if there is, you will still be paying).

What’s great about the dedicated team model is that you won’t have to worry about project management since it will be the team’s responsibility. As well, with a dedicated team, you can always be sure the team will be available whenever you need it (unlike the time and materials contract).

A dedicated team model is best used for:

• Long-term projects with evolving requirements;
• Projects that are to be expanded in the future;
• A project where retaining a skilled engineering talent is a high priority;
• Projects that will greatly benefit from a high level of flexibility, ability to experiment and make adjustments quickly.

Dedicated team: pros and cons

While we prefer the dedicated team model, we also understand that there are certain considerations related to its deployment.

Dedicated team pros:

• The team takes full control of the processes and project management;
• Transparent and frequent communication with the team;
• The team only focuses on the project without any other distractions;
• A high level of professionalism and knowledge;
• A fast and flexible workflow.

Dedicated team cons:

• Possible high costs in case of the downtime;
• A significant amount of time is needed to select the right team.

Below is the table summarizing all three models and their features to be compared:

 SoftTeco’s recommendations

As every model has its advantages and disadvantages, it can be quite hard to choose the right one for your project. Here are some recommendations based on SoftTeco’s experience in working with all three models.

At SoftTeco, we often work through a hybrid model that combines both Dedicated Team and T&M models. A hybrid model means we provide a dedicated team to a client which forms the core part of the team in the long run. We then augment it as needed with additional resources using the Time & Materials contract. Such an approach guarantees there is always a team of professionals at the client’s disposal but at the same time, if a client needs any extra set of skills, he can request it in the form of a T&M task, and once their skills are no longer required, they can be offboarded as per the T&M contract terms.

Another recommendation for work by the DT model is to assign a project manager to a team in order to control the team’s workload and ensure the team remains busy. As well, a manager can communicate with the client and inform him either about not having enough tasks for the team or about having too many (in this case, the manager would recommend expanding the team).

As for the fixed-price contract, a software company provides both software development services and is responsible for the management and QA. Hence, all aspects of work have to be discussed in advance in order to avoid any misunderstandings and possible project delays.

Do you still have any questions left or need more help in choosing the right pricing model? Contact us and we will gladly guide you through the process of project estimation and evaluation.