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Choosing Between a Time-and-Materials or a Fixed-Price Contract

October 31, 2023.

What are the advantages to each option, and how do you choose the one best suited for your software development project? What factors should guide your decision to go with a Time and Materials (T&M) project or with a Fixed-price contract?

Spiria teams have thorough and extensive experience with both types of projects. In this blog, we’ll share what we have learned on the subject over the years and what criteria contribute to the success of each option.

But first, let’s go over those two types of projects:

Time & Materials projects

These are projects whose scope (activities, deliverables, inclusions and exclusions, etc.) are moderately well defined. The initial proposal provides an estimated price range for completing the project, after which costs are billed based on actual hours worked plus the required hardware and resource expenses (such as software licenses or cloud services). This approach is more flexible, as it allows both parties to adjust or change the specifications throughout the development process. This encourages agility and puts an emphasis on project management controls.

Fixed-price contracts

In contrast, the scope of this kind of project is usually well or very well defined. The initial cost estimate can be stated with confidence because it is based on more reliable information than in the T&M project. As the name suggests, costs are established at the outset, regardless of the actual hours worked and the materials and other resources expenses. Therefore, risk and profitability are critical considerations in opting with this type of contract. Any change to the initial specifications is policed by a change-request process and is billed as additional work.

Let’s imagine a first scenario in which a project has been previously defined. The client would opt for T&M or Fixed-price, a decision sometimes dictated by the organization’s internal requirements or even by industry regulations. This is often the case with calls-for-tender, which are mostly Fixed-price. Whenever possible, Spiria suggests an approach that leads to a better understanding of the project’s scope, thus mitigating risk. Spiria could recommend that the client invest in an initial discovery phase, whether in T&M or in Fixed-price mode, then propose the actual development and deployment phases as Fixed-cost. This helps the client assess whether it needs to change priorities or modify the scope as a result of the discovery phase. This flexibility allows us to negotiate the defined scope while amending the inclusions/exclusions, in order to remain within the agreed contractual Fixed-cost budget.

A Typical Project Cycle.

Figure 1. A Typical Project Cycle.

In a second case where the type of contract is not predetermined, we have more latitude to choose our strategy. A client schedules meetings with various suppliers for a Q&A session, followed by internal discussions to evaluate the factors leading to the best strategy. To help the teams decide, the table below presents a non-exhaustive list of criteria that are quantifiable (easily identifiable and measurable) or qualitative. The answers will depend on the information provided during the initial meetings and in the specifications, and on information obtained by asking the client directly. The symbols in the two right-hand columns suggest ways to weigh the answers relative to the two types of projects.

Points Fixed T&M
The business plan, requirements, needs and expectations are clear. ➕➕
The business rules and processes are numerous and complex. ➕➕
The client’s budget is defined and budget planning is set.
The schedule is tight or critical due to the client’s circumstances or business context.
The required expertise is clearly defined.
The organizational and decision-making structure is large and complex.
The legal aspects are complex.
A past relationship already exists, or a mutual contact recommended us.
The risk, uncertainties and contingencies are high.
There is a high likelihood of scope-creep.
The client has staff or other internal capacity
(designer, development team, QA, etc).
The technological environment is familiar.
There are significant technological constraints (e.g. legacy system).
There are many and complex challenges to integrating the solution.
The choice of technology is pre-established.
Data is available to reliably do quality assurance.
The solution is subject to special certifications.

This reflection can lead to different approaches, represented in the following diagram:

 Possible strategies or approaches.

Figure 2. Possible strategies or approaches (click to enlarge).

The strategy selected dictates how the contract agreement is concluded and has implications for the entire life of the project and its final success. The relationship will start out on the right foot if our process is transparent and we can explain our reasoning to the client. Our ultimate objective is to deliver a project that respects our Spirian values and that provides the expected value to the client.