Fixed Price vs. Time and Materials

First, let’s define Fixed Price and Time and Materials (T&M), as both terms encompass more than just what one immediately thinks of.

Fixed Price most often takes the form of a flat cost for the entire project, but can also take the form of a cap on hours/total cost, or even be piecemeal, flat fee pricing for individual features. There are also many ways of splitting up the flat cost over the course of the project, but ultimately, if the contract results in one amount of money being paid for the end result regardless of what happens throughout the project, then it must be considered Fixed Price.

T&M, on the other hand, is about sticking close to the incremental cost of the project as it progresses. Often this means the service provider will charge hourly, daily, or weekly for the services they’re providing, along with the material costs in that time period.

When shopping around for an app, many entrepreneurs balk at trying to do things under a T&M agreement. After all, how can you make sure your app stays within budget?

Unfortunately, fixed price projects often end up costing more money than T&M. This almost always comes from one root cause: no matter how much we wish it were otherwise, projects rarely end up being fixed in scope from the beginning. Whether it’s because something important was entirely forgotten or simply needs to be changed, projects of any kind are never perfectly planned from the beginning. This has a couple of consequences.

Consequences of Changing “Fixed Prices”

First, when something needs to change, you may need to recalculate the quote, sign a new Statement of Work (SoW), or renegotiate the contract entirely. As we all know, lawyers aren’t cheap, and even if you don’t need legal help to adjust the contract, you’ll still be wasting valuable time.

Second, any contractor who’s done more than one project knows that uncertainty is a part of the job. This is often built into the fixed price quote given, so even if the project does go perfectly to plan or even just under budget, the client never sees that benefit. The best companies I know always try to under-promise and over-deliver, but a fixed price means that even if they’re weeks ahead of schedule, the client sees no change in the cost.

Finally, in effect, fixed prices transfer all risk to the service provider, rather than splitting it between client and service provider in a collaborative manner. As a result, the service provider has a fiduciary obligation to the business’s stakeholders to charge the maximum it could potentially cost, which isn’t ideal for anyone involved. In fact, when working with an experienced service provider, it always results in a higher cost for the client than T&M would.

Time and Materials

T&M projects avoid these pitfalls. Change is easy to manage when you’re simply paying for an expert’s time, and if the project is done early or more cheaply due to unforeseen circumstances, the client will reap the rewards. Every project we’ve worked on has seen some point where the client realizes they need X other feature as well, or doesn’t need Y screen, and with T&M these changing requirements can be effortlessly incorporated. Indeed, the client is able to respond to market changes in real time, which has repeatedly made a difference between having a fighting chance and utter failure.

But what about when the project drags on and on? Often, the whole reason clients look for fixed price quotes in the first place is to try to cap costs incurred due to the contracting company making mistakes. So what happens when a project goes off the rails?

Unfortunately, in most cases, fixing the price won’t protect against going over budget. Let’s look at an example.

Suppose a client engages a company for a fixed price app, for simplicity’s sake, it’s 50% up front and 50% when it’s delivered, with weekly product demos over 12 weeks. Week one comes and goes, and the company has nothing to show for their work due to ‘unexpected difficulties.’ The following week, they’re able to show a very rudimentary prototype of week one’s tasks. In the third week demo not much has changed in the prototype, but they assure the client that they’re ‘making progress.’ At the end of the fourth week, they tell the client that it’ll probably take 24 weeks rather than 12.

What can the client do? They’ve paid for 6 weeks of a 12 week project, but now the quote has doubled. It’s clear the company is in over their heads, but they probably aren’t willing to stick to the original price, and obviously not the original timeline. The choices are grim: pay double what was expected—for what may very well prove to be a shoddy product— or, start fresh with a different company and a loss of 50%, or sue (we at LithoByte have worked several times with clients that have had to cut their losses in this way and came to us to help complete the project).

If, on the other hand, the project were T&M and paid bi-weekly, at the end of the fourth week when the client gets hit with the updated timeline, they’d only be down a sixth of the cost. With T&M, you’re able to minimize your losses should something go wrong.

Why LithoByte

This is why we at LithoByte rarely recommend a fixed price contract. T&M allows us (or any provider) to give you maximum flexibility while keeping costs low and, ultimately, minimizing risk. The next time you go looking for a quote, by all means ask for a cost estimate, but do yourself a favor and make sure you make the contract T&M.