Fixed price or time and materials: which is right for your software development project?

Businesses are increasingly turning to outsourcing software development companies to bring their product concepts to life. However, to ensure these products are profitable, it’s crucial to consider various factors, including the type of contract between the vendor and the client. There are two main models for business engagement—fixed price and time and materials. This guide will help you understand how they differ and how to select the right model for your project.

Fixed price

The fixed price (bid/cost) business engagement model is characterized by strict terms, a defined scope, and a firm budget. Under this model, the vendor provides a comprehensive estimate of the project’s cost and timeline based on a clear picture of product requirements. This structured approach is ideal for short-term projects with limited resources and a strict timeline when the scope of the work is clearly defined.

However, the fixed price model has some limitations. It is difficult to make any changes once the development has begun and any alterations must be individually approved. The inflexibility of this model is one of the reasons for its declining popularity, with a growing number of companies opting for the more adaptable Agile approach.

Time and materials

The time and materials model is a more flexible and dynamic approach that aligns with Agile methodologies. Under this contract type, the client only pays for completed tasks and solutions, which allows for prompt adaptation to ever-changing market demands and product requirements. The client company can control the budget through an efficient process. Agility involves breaking the project into iterations, prioritizing tasks, and setting time frames. This approach allows for quick adjustments in direction and efficient resource allocation.

The time and materials method is particularly suitable for large projects that lack a well-defined work scope or project specifications. This model is also a good choice for companies facing challenges in an ongoing complex project and needing to fill gaps.

Fixed price vs. time and materials: a comparison table

How do you decide?

Your choice of model depends on your priorities and project needs. Answering the following questions can facilitate your decision-making process.

Is your project scope clearly defined?

Estimating the scope of a project, particularly when it’s large and complex, can be challenging, especially when identifying all its necessary features and components. In this case, the time and materials model is the best option, as it facilitates seamless adjustments to any changes. However, if you know what you want down to the last detail, the fixed price model might be a better choice.

Do you require flexibility?

Technologies are constantly evolving, shaping market and industry demands. In this ever-changing landscape, it’s vital to stay competitive and quickly adapt your product or service to meet customer expectations. In many industries, flexibility is a priority. The time and materials model allows companies to change direction and easily scale the project. This may be unnecessary for industries with strict standards, such as the military or legal sector.

How involved do you want to be in the process?

With the time and materials model, constant collaboration with the development team ensures control over product quality and delivered features and makes the process more adaptable. In contrast, the fixed price model lacks this level of control, with rigid requirements that are difficult to change, potentially limiting software quality due to budget constraints.

Ultimately, the choice comes down to assessing the advantages of each model for your software development project and prioritizing the aspects that are most important to you.