Time & Materials, Fixed Price and Dedicated Team: IT Outsourcing Engagement Models

Choosing the right type of cooperation is important for both the client and the contractor, as it minimizes risks and increases the chances of a positive outcome for both parties. Arrangement of relations is a really important basis for success.

There are three main models of cooperation in software development: Time and Materials, Fixed Price and Dedicated Team. Each type has its pros and cons, so choosing between them can be a complicated task. The option that is optimal for one project may be far from ideal for another.

Alternatively, you can compare the pros and cons of a particular engagement and pricing model and choose the most appropriate option based on a specific project type. This is clearly the better option. So let us look at this issue in more detail.

Fixed Price Contract

This model of cooperation in IT outsourcing implies that the development budget is approved before work begins, based on an assessment of its amount, and is not changed later. Project deadlines are also approved at the beginning.

At first sight it is very convenient. The client clearly sees the amount to be paid and the delivery schedule. The timeline of the entire process, its costs and the features to be implemented in the product are known immediately. Just pay and wait for the work to be done, with minimal interference in the process.

Ideally, it should look like this:

That is, a fixed price contract means that all terms remain the same. However, we all know that it is never like that in reality. As a result, we receive the following picture:

The business world is constantly changing, so you need to adapt to those changes. Work processes and entire business models are changing. But you are still locked into the narrow confines of a fixed contract. In many cases, this can be a problem.

Among the advantages of the fixed price model, the following may be highlighted:

• Predicted budget. The customer knows clearly how much money will be spent on the project implementation, and this makes planning easy. You know the exact final price of the entire project.
• Predictable results. The list of tasks to be completed within the process, and a result that must be achieved, are agreed upon at the initial stage.
• Fixed timeline. Both the customer and provider know the timeline allocated for project implementation.
• No need for strict control. All the details are specified in the contract.
• Administrative load is minimal. You know what needs to be done at once; therefore, you will spend minimum time on interaction. You may quickly start working.

Disadvantages of the fixed price model:

• Minimum flexibility. Lack of possibility to introduce changes or additions after the contract was signed.
• Risk of overpayment. Engineers often include all possible risks of additional development hours into the fixed price.
• All changes should be agreed upon. You will have to pay for any change request or additional function that is not included into the scope of work within the contract.
• Communication risks. If you missed some details, you may receive something different from what you expected.
• Possible compromises in quality. If in the course of development additional tasks appear that are not foreseen by the budget, the provider will most likely ignore them in order to be able to finish everything on time; this will affect the quality.

Despite the above, a fixed price model may be a good choice in the following cases:

• a small project both in the scope of work and timeline;
• a list of tasks is defined 100% and probability of change is very unlikely;
• flexibility is not needed, since everything has been agreed in advance;
• turnkey approach. It is a typical solution, where only small changes are made in order to adapt to a specific customer.

In general, fixed price model has its benefits. However, it is not the best option when speaking of software development.

Time and Materials

The essence of this pricing model is that the client pays for the actual hours spent by the service provider. Depending on the client’s requirements, payments are made after each stage, every month, every six months, and so on. Estimation of the scope of work and project deadline is approximate, the final result and its quality are the most important.

An important advantage of Time and Materials model of cooperation is a high degree of flexibility. In the process of software development, the customer can change requirements, disable and add functionality, i.e. do anything to get exactly the result he needs.

The development team is not constrained by a tight budget and timeline, so they are highly motivated to find and deliver the most effective solution to the customer. They can pay more attention to a particular area of work if it helps them achieve the best result.

Work on the software project is divided into separate stages; each of them is estimated separately (in hours). Thereafter, such estimates are agreed with the client. Once the task is completed, the customer pays for the work, and developers start assessing and working on the next sprint or milestone.

Main advantages of Time and Materials:

• Quick start. No need to think through the future product to the smallest details, which may usually take a good deal of time. The provider and the client discuss the hourly rate and estimated scope of work; this is when the work begins.
• No extra payment. You pay for the actually completed work only. You pay for the time spent directly on your project.
• Flexibility. In the course of development, you can easily make changes, change the scope of work and use flexible development methodologies (agile methodology). The reaction rate is also very high.
• Feedback, control and transparency of the performance. The customer communicates with the project manager, and the manager allocates tasks within the team. The customer has access to any required information and is continually aware of the development process.
• Practical testing of hypotheses. You can quickly create a product MVP and test it in practice, for example by releasing a test version. It enables prompt receipt of the target audience reaction and understanding what needs to be changed or improved.
• Setting priorities. Which features should be implemented in the first place? Those that bring profit quickly or those that are key for the end user? Is it better to start with simpler or more complex things? The choice is yours and you may change it any time.

This pricing model also has its flaws. Here they are:

• Undefined budget. Since only the approximate project implementation costs is known, there is a risk of exceeding the expected budget.
• Intensive communication. Communication may be both a positive and a negative factor. Everything depends on the way you look at it. Not every customer may keep in touch constantly, especially if the team works in another time zone.
• Complicated release forecasting. In the process of developing, a mind map of project tasks is changing all the time; therefore, it is complicated to forecast the time of project completion accurately.
• Administrative expenses. Time accounting, reporting, and other similar things – all of these formalities require a lot of time.

Time and Materials model is suitable in the following situations:

• requirements to the product functionality and scope of work are expected to change in the course of development;
• the customer has no clear requirements and detailed specifications or the customer simply has no time to allocate time for their preparation;
• the project is of high scalability and presupposes large scope of work;
• the product quality is of utmost importance to the customer and the customer is not discouraged by the idea of spending more resources than initially planned.

Thus, Time and Materials model is oriented on achieving a high quality product. Flexibility of the development process, readiness to changes, transparency of cooperation and close communication greatly contribute to the achievement of this goal.

Dedicated Team Model

At first glance, a dedicated team model may seem similar to Time & Material. However, there are several differences that make it useful to separate this model. If we try to consider how much clients can pay for hiring such a team, we will see that they will spend on the monthly salary of all developers and various administrative costs.

It is the client who makes a decision about the future team, regulates the number of specialists and defines their level of expertise. A customer can also manage this team independently and leave the administrative part to an IT outsourcing service provider.

A dedicated team model has several advantages as follows:

• A customer exercises complete team control and management and determines load levels.
• A team can profoundly concentrate on its tasks, as it focuses only on a peculiar project and is not anyhow distracted.
• The model lets you select specialists, define their expertise level, find out how they understand the required technologies, and build a team of high-class professionals.
• A provider makes a remote team available for a customer, solves many issues related to human resources, selection, hiring, and team size, and always has a clear understanding of expenses planned for the following month.
• Working on a dedicated team model also ensures flexibility and quick adaptation to changes in business requirements.

A dedicated team model has the following disadvantages:

• It may take a long time to select the appropriate team configuration. Additional high expenses are also possible in case of idle hours.
• With an incomplete requirements document or unclear specifications, a remote team can handle a development process at their own discretion, and this approach is not always viable. On the other hand, if we talk about experienced professionals, most experiments of this kind will justify themselves.

A dedicated team model suits the following cases best:

• Long-term projects with changing requirements;
• Projects where you plan to increase the workload in the future;
• Projects that prioritize the involvement of skilled developers;
• Projects that require a high degree of flexibility, experimentation, and the ability to make changes quickly as you work.

Which Engagement Model to Choose for Your Project?

Each of these two types of contracts has its advantages and disadvantages. We have described them in this article and hope it will help you make the right decision. Even if you have already used a certain model, it is quite possible that another option will be better for your next project.

When it comes to software development, the time and materials model is a better solution than the fixed price. This model allows for dynamic response to any changes, requires close communication and discussion of all details, which helps to get a project that is exactly what you want to see. It may take more time, but the quality is more important.

In any case, consider the specifics and needs of your business. If you are not sure which model is best for you, contact us – we are always ready to advise you and answer all your questions.

We have extensive experience in successful project implementation in various fields and are ready to help you bring your ideas to life.