Why We Quote Using a Time-and-Materials Pricing Model
Software development is just as much about choices as it’s about a fancy tech stack. What platforms do you build for? Which technical specifications do you keep in mind? Which pricing model do you choose? The latter is what we will look at today.
Most companies use one of two pricing models for development projects: time and materials or fixed fee.
We will dig into how these two models work and provide the advantages and disadvantages of each. Each strategy has nuances and limitations, but time-and-materials pricing wins out at Detroit Labs. Read on to learn why!
What is time-and-materials pricing? In a time-and-materials contract, you invest in a few things: a development team and the amount of time the team spends on your project. Here, you get the freedom to increase or decrease the scope of the project and the team’s workloads.
Time-and-materials pricing is ideal for long-term, must-have projects. Both the client and development team have a mutual understanding that the project will require significant ongoing work on their platform. Because of the complexity of these projects, the client has two options: outsource the work or hire an internal team to manage it.
Advantages and disadvantages of time-and-materials pricing
There is a little bit of give and take with any pricing strategy, and time and material is no different. Flexibility and company size are major factors.
First off, time-and-materials pricing reflects the nature of building software the right way. That is to say it takes an agile and iterative approach with an effective strategy. Instead of estimating and scoping the entire project upfront, both clients and their development partners get some wiggle room to learn and pivot based on each progressive iteration.
This strategy also provides the flexibility to ebb and flow the development team based on project needs. This way, it’s easier to deal with unforeseen issues or change project elements as needed to produce the best results. Having such an open contract reflects the reality of how you’re doing all of this.
Sometimes, what’s good for the goose isn’t good for the gander. At least, it doesn’t seem like it will. The time-and-materials model has its drawbacks.
The main thing has to do with company size. Large organizations like to set budgets because it helps with overall planning and forecasting. Companies like this can still opt for time-and-materials projects, however. The model is made to flex with your team and work within your budget.
On the other side of the fence is fixed-fee pricing. In a fixed-fee model, projects have a set price, regardless of the actual time and materials they require. In industries like construction, it’s helpful to scope an entire project up front and estimate an appropriate fixed fee—avoiding surprise charges later. Once the client and development team agree on this fee, the scope is effectively “locked,” and the project begins.
In practice, fixed-fee pricing works best for smaller projects that likely won’t change. It is also ideal for companies that need to plan their budgets. That’s why it’s normal to have conversations about minimum viable products for fixed-fee projects because it’s challenging to get everything done within such a tight budget and timeline.
Advantages and disadvantages of fixed-fee pricing
Although there are upsides to fixed-fee arrangements, the model is generally more difficult for major software projects. After all, software development isn’t linear and is bound to change throughout the process!
First things first: The biggest draw for a fixed-fee arrangement is the pricing “guarantee.” We use quotes here because that guarantee only stays intact as long as the project stays in scope. Similarly, in this model, you work within well-defined project phases and deadlines, so long as nothing changes.
There are issues for both clients and developers who work within fixed-fee pricing strategies. In these situations, you may end up with more tension than quality development.
For one, some developers who operate under fixed-fee pricing don’t always do so honestly. Instead, they cater to the budget to win the job over competitors, undercutting the project. As a result, your fixed fee might not cover everything you expected.
This creates a ripple effect because you have to change orders after the project has begun. These out-of-scope changes mean your project cost rises, threatening your budget. Accommodating your requests adds complexity to your project, putting strain on the development team. This can increase turnover, dragging out the timeline because new developers must be onboarded. And because the original estimate wasn’t fulfilled and the project didn’t go as planned, you are left with an uneasy partnership.
Regardless of whether a time-and-materials or fixed-fee pricing model is used, Agile is still the methodology used for software development.
Why Detroit Labs uses time-and-materials pricing
At Detroit Labs, we use a time-and-materials pricing model. Under the right circumstances, we will use a fixed price (without locking in scope), but we’ve learned it doesn’t set our partnerships up for success.
Generally, our customers hire us because they need our expertise, and we provide support throughout the process. Time-and-materials pricing allows us to offer this level of service and maintain our promise of being good stewards of your project.
That doesn’t mean we ignore your budget. In fact, it’s one of the first aspects we discuss with you. This information helps our team plan the best path for your project. If we find that we need to flex, we usually can. At Detroit Labs, we do everything we can to respect your budget.
The Mythical Man-Month
One resource software developers have referred to over the years is The Mythical Man-Month by Frederick Brooks. Among many things, the biggest takeaway became known as Brooks’s Law: ”Adding manpower to a late software project makes it later.”
At Detroit Labs, we take this concept to heart and build projects the right way, rather than adding more people and steps to spend your money and complicate projects. We also extend this to billing and invoicing. Our pricing is transparent, and our team members are billing on a full-time equivalent (FTE) basis.
Trust Detroit Labs with your time-and-materials project
Struggling to decide between time-and-materials versus fixed-fee pricing? You have choices when you begin a new software development project. Fixed-fee pricing has limitations that ultimately force clients to spend more. But our time-and-materials model fosters collaboration between the Detroit Labs team and your company, contributing to the success of your project in the long term. We want to establish a true partnership with you.
Not sure how to properly budget for a time-and-materials project? We can help. Speak with a member of our team to learn more about budgeting for time-and-materials projects.
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