What payment model should you choose for your project: ‘fixed fee’ or ‘time and materials’?
This year TDCM started conducting Client Satisfaction surveys that assured us what problems aspiring entrepreneurs encounter when starting their first endeavor. After hearing a lot of stories about the harsh beginnings of our clients’ enterprises, we are ready to answer the most commonly asked questions.
The first inquiry we’re about to address is one of the most frequently appearing and tricky ones. Should you go with a previously defined fixed fee or hourly billing? Apparently, there is no one simple answer to the question. However, we know how to make a good decision at this point. So, what’s the right choice? It depends.
Let’s suppose that your product is simple and well-defined - like a small plugin or a one-screen companion app. Then there is no brainer - go with a fixed fee. The main additional cost in 'fixed fee' estimations derives from the uncertainty of the app’s/site’s functionalities, looks, and final requirements for a creative agency. If you can lay it out for your programmers on day one, then the safety margin should be accordingly minimized.
Now, if you have never drawn the screens, pop-ups, buttons, and input fields for your app… be honest with yourself! The truth is that unless you 'play' with the app on a piece of paper, you cannot have a good understanding of how it should work. So, should I pay developers on an hourly basis? - you ask. You can, but there should be a clearly defined ceiling for the number of hours you are able and willing to pay for.
One of the first questions a good Project Manager or Delivery Manager will ask is going to be about your budget. If that’s a software agency with a good reputation that you’re dealing with, it won’t inquire into that in order to rip you off to the last penny. He will ask you so that it is possible for him to estimate if the project is doable and what eventual inefficiencies can be removed. Another less obvious thing is that by answering this question you would make it easier to establish what changes you might want to include down the road.
Any respected software house intends to deliver a fully functional and successful product. There is no altruism in that. Why? Because a client's success may bring more opportunities for further product development and, therefore, more work for a software house in the future. This is a current and prospering client simultaneously. That's why good software houses do not take on projects they don’t believe in. That's one of the reasons developers care for your success. They need your product to be finished and pushed to a market, or at least prepared for another financing round. If you find a good software house, your goals are their goals.
The question of "budget size" when you pick "hourly rate billing" aims to establish how much freedom for making changes during the development process you can be granted by a PM. The flexibility of scope for a Time and Materials approach grants you the privilege to change almost everything during a development process… and, with all certainty, you will want to do that! Every week, when you are thinking about your new enterprise and waiting for a new demo, new ideas, and adjustments will pop into your head. Most of them will be possible to implement without cost changes, but some of them may lead you into an endless rabbit hole. It is your Project Manager's responsibility to stop you and keep the project within the original budget and timeline.
Additionally, it is worth keeping in mind that new technologies (that may translate into more possibilities) and opportunities (such as business-related ones) may emerge in the meantime of the software development process. Let’s take ChatGPT as an example of such an occurrence. The tool has been widely available for a year merely. In a short period of time, however, it will be capable of reading photos and explaining what's in them. In the world of IT, things tend to change dynamically.
We understand that there can be some trust issues. This is why both sides need to prove their trustworthiness.
There is a third hybrid approach that we suggest.
Every great software contractor will create an estimation sheet for you containing all functionalities you discuss and unit cost per functionality. Pick one. A simple one. Spend an additional week or two to perfect it. Draw it on a piece of paper. Do a survey with your friends. Make sure it is as well defined as possible. Then, order that part on a fixed fee pricing. A righteous IT supplier will charge you somewhere around 25 to 50% of that cost upfront and the rest when you accept the job.
Receive the work, present it to your friends (maybe you’ve got tech-savvy friends that can opinion the code?), and if you are happy - pay fully for this part and switch to Time and Materials.
If you are not happy, just ditch them and call us 🙂
Let us know what you think about us continuing the series of articles like this one. If you disagree with something you’ve just read, send us an email or leave a comment on one of our social media accounts: LinkedIn: https://www.linkedin.com/company/tdcm
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