Time & Materials or Fixed Price?

In the broadly defined new technologies industry, the very popular models of settlement of cooperating entities are: „Time & Materials” and „Fixed Price”. Each of them has its own characteristics, which for some will be an advantage and for others a disadvantage. What are the characteristics of the above models of accounting, what are their advantages and disadvantages and which of them should be chosen?

Time & Materials

This is a phrase used in contracts for a given project in which the Client agrees to pay the Contractor a fee calculated on the basis of the Contractor’s time spent and for the materials used in the project. A „Time and Materials” contract is often used for projects where it is not possible to accurately estimate the size of the project or its requirements.

In case of application of this billing model, bills/billing are issued by the Contractor based on hourly labor rates, i.e., the so-called man-hour. The main advantage of this billing method is flexibility and the ability to adapt to the requirements of the Customer.

This model allows the Customer to be familiar with the project on an ongoing basis, make changes and modifications. When as a Customer you are not able to precisely define the scope of the project and you want to take advantage of the Contractor’s help in this area, then the „Time & Materials” model seems to be a reasonable choice.

Fixed Price

Billing under the „Fixed Price” model involves billing for the project for a predetermined amount agreed upon by the Parties. The Contractor is obliged to complete the project within the agreed price and deadline.

It is advantageous to choose this model when the rates and performance framework for a given project are predictable and the cost will not change over the course of the project. This model is often used for smaller projects of limited scope when we have clear requirements, fixed deadlines, and a limited or fixed budget to complete the project.

Advantages of the Time & Materials model

• Quick corrections and adaptation of the project to the client’s expectations.
• Determination in advance of the hourly rate for time spent on the project, indication by the Contractor of the materials used to complete the project.
• Possibility to set aside additional time to complete the project according to the client’s expectations.
• Shaping the project on an ongoing basis according to client requirements or changes and market needs.
• Freedom to negotiate a contract.

Advantages of the Festpreis model

• Ability for the Employer to control the amount due to the Contractor.
• Controlling and making it easier for the Employer to manage the company’s costs in hiring external parties.
• It provides stability to the parties – this can be a beneficial model for small businesses or start-ups that don’t have a flexible budget.
• Plan the entire project in advance with the ability for the Contracting Officer to know when the project will be completed.

Disadvantages of the Time & Materials model

• If you don’t set a limit on costs, time, and materials up front, you may have a problem going over the budget you have.
• On the Ordering Party’s side, there may be a problem with keeping track of the amount of material used or the actual amount of work necessary to complete a given project.
• There may be a problem with a Contractor who is using far more time than is necessary for the project – in which case it will become necessary to negotiate a Contract.
• There may be a problem with not being able to establish a time frame for project completion.

Disadvantages of the Festpreis model

• Lack of flexibility. In this model, there is a predetermined scope of the project and the cost we can spend on the project.
• Less involvement of the Contracting Authority in the project. All arrangements have been made at the contracting stage, which may lead to less involvement of the Contracting Authority in the project at the implementation stage and, consequently, the final result may not be entirely satisfactory.
• Lack of flexibility and rigid financial and time frames can cause conflicts.
• On the part of the Contractor, there is a risk that during the necessity to make a change in the project and the need to obtain a higher remuneration – the Contracting Authority will not be able to provide it.

Which model to choose?

Each of the above models has its advantages and disadvantages. The choice of the most advantageous model depends on the Ordering Party’s business assumptions, circumstances and experience in commissioning given projects.

Choosing the „Time & Materials” model leads to a smooth relationship between the parties and gives the possibility to adjust the final result of the project to the expectations and preferences of the Client.

It is suitable for:

• long-term projects
• projects without predefined requirements
• projects that adapt to the needs of the client and the market
• projects with flexible budgets

The choice of the „Fixed Price” model, with the knowledge of the subject matter of a given project, allows to obtain the final product with the assumption of a predetermined pricing.

It is suitable for:

• projektów z ograniczonym budżetem
• projects with limited functionality (small or medium-sized projects)
• projects to be carried out within a predetermined period of time
• projects that have agreed individual requirements and functionalities

For the final selection of the model, it is necessary to individually identify their strengths and weaknesses.

Combination of Time & Materials and Fixed Price models

In practice, it is also possible to combine the above-mentioned models, e.g. in the design phase the „Time & Materials” model can be used due to the flexibility of creation and possibility of changes, while in the development phase the „Fixed Price” model can be used.

It is also possible to draw up a framework agreement providing for both models of settlement and to obtain flexibility in placing orders for given projects, depending on the Client’s expectations.

If you have any questions or concerns about the best model for you, I invite you to consult with me and get help choosing the best option.