What billing model is the best fit for your project? Fixed Price vs Time and Materials vs Dedicated Team
The first question that you should ask yourself before contacting the IT outsourcing company is “what billing model is the best fit for my project?”. If you are confused about choosing an outsourcing model from the Dedicated team vs. Fixed price vs. Time and Materials for your business idea, then welcome aboard!
In this article, we will compare these business models for your project. Let’s analyze each in detail and describe the advantages and disadvantages of 3 main IT outsourcing models.
The fixed-price agreement is a single-sum contract where the software development team must deliver the project within a predefined sum which is agreed by both parties. A client should be able to share his clear vision of the product with developers to ensure appropriate final results. This model requires the client to provide a detailed list of requirements for the project and all required developer documentation.
Pros of fixed price model:
- Clarity. Project requirements are agreed upon before signing the software development contract, as well as all the required developer documentation is specified beforehand.
- Accuracy. The project scope and time frames are known and discussed in advance, so the team can set the deadlines and it is convenient to monitor the project progress.
- Autonomy. The development process is coordinated by a project manager, so the client’s participation isn’t necessary.
Cons of fixed price model:
- Preparation. The period is needed as all requirements for implementation and deadlines must be documented.
- Inflexibility. Any change in the scope of work would cause a change in the total cost of the project and this change would be compensated by the service provider’s end.
- Risks. If you don’t provide your requirements correctly, then the delivered product won’t be the same as expected.
When is recommended to use a fixed price model:
- Clear requirements and determined deadlines.
- Limited or fixed budget.
- Small and medium projects with limited project scope of work.
Time and Materials
Time and materials contract is absolutely different. This model is great suited for long-term projects with changing requirements where the final requirements are not known in advance and can be changed on the go. This is a flexible approach to IT outsourcing, as the customer pays in smaller chunks for work accomplished during the billable hours. To say more, this pay-as-you-go model allows you to pay only for the work actually done. For example for features delivered, milestones, etc.
Pros of Time and Materials model:
- A flexible approach. The customer can change the scope of work, requirements or add/drop features on the go to meet his business aims without thinking about the budget. This model perfectly combines with modern agile methodologies, for example with Scrum.
- Transparency. This model allows the customer to control the cost and concentrate on important elements of the project. The client pays only for the results actually delivered.
- Involvement. The client can monitor the process of the development of a certain work schedule in accordance with the expected results.
Cons of Time and Materials model:
- Budget and time. It is not always possible to estimate the budget in advance. It’s hard to predict when the product will be delivered or how much it will cost. This depends on the accuracy of the specifications or its changes in the process of work;
- Communications. To achieve a high-quality product, continuous communication with the team is necessary. It requires full-fledged involvement from your side which includes spending much time in communication with the development team.
When is recommended to use Time and Materials model:
- Long and middle term projects with dynamic requirements;
- Project scope is not fully known;
- The customer wants the flexibility to modify the project scope.
The Dedicated Team model is used to compensate for the lack of in-house IT expertise on mid-to-long-term projects. The billing is based on hourly rates of the developers and they become a part of a team that is only concerned with the project and not engaged in any other tasks. The developers report directly to the client. However, the client is responsible for team management and control.
As an example, let’s say the client wants to develop software that is not in his team’s expertise, he can hire a developer or team who can do this. In this case, the client can outsource to an experienced team that can help him fulfill his customer’s needs by creating rich quality projects. This will enable the client to maintain stability between your team and the dedicated team.
Pros of Dedicated Team model:
- Control. The customer is provided full control and management of the team. Cooperation between the client and the team is very important because it allows for effective planning and evaluating the strengths and weaknesses of the work process.
- Development. When a team is focused on one project, it ensures the best results. The team has a full understanding of all project features and is dedicated to running the project smoothly.
- Progress. The ability to optimize the product is important for product growth. With the dedicated team, it is much easier.
- Reduced costs. The remote team solves many problems with the recruitment and hiring of staff. Plus you always know the next month’s payments and taxes.
Cons of Dedicated Team model:
- Thoroughness. The client must consider process planning and task distribution for every member of the team.
- Engagement. You might have to invest more time in communication, discussion and software development.
- Graduality. Looking for the perfect candidate takes a lot of time and the client has to be involved in hiring team members.
When is recommended to use Dedicated Team model:
- For long-term IT projects with rapidly changing scopes.
- Adding more workforce to set-up a strong development team.
- When you want to access cross-border expertise and knowledge sharing.
To sum up, every project provides the best results when it is managed according to the most suitable IT outsourcing model. Each software product development pricing model has its pros and cons. Choosing the best possible approach fully depends on the specifics of your project and expected results.
According to this, the first step is understanding your business model’s requirements. After determining your project’s needs, you can select the right outsourcing model and start with it.