Time and Materials or Fixed Cost: Why T&M is Best

Time and materials or fixed cost: when to use each model

It is tough to know which project approach is better: time and materials or fixed cost. When my web development company started to move from a Fixed-Cost project approach to Time and Materials (T&M) with clients, our entire business changed. Client satisfaction improved dramatically. Team morale increased noticeably. Size of projects that we could successfully complete grew past our expectations.

How did this happen? We discovered that clients are concerned about three areas of a project — timeline, quality and budget. In a Fixed-Cost project however there often is a tenuous relationship between these aspects of a project. Does any of this sound familiar? If not, think of your team and yourself in the following scenario.

Timeline, quality, and budget

Scenario: In order to close the deal, you agreed to a Fixed Cost project at 1,000 hours. Your team was unrealistically hopeful that it would be easy. Halfway into it, however, the team realized it was much, much more difficult and time-consuming (nearly double) than expected. They can respond one of two ways.

Response 1: The development team focused on getting the project done quickly, without involving the client much and cutting corners to save time. Why? Because no one wants to work for free. When the dust settled after the hectic project, there stood an unhappy, underserved client and a relieved (and panting) team.

OR

Response 2: The team allowed the client to be involved in every step of the project and the team members meticulously gave their best at every moment. The team worked long hours, getting paid less for a project well done. The result: disgruntled, overworked employees and a satisfied client.

No one wants a repeat of either scenario. There is a time and place for Fixed Cost projects, but project qualities must be determined beforehand. This keeps the three areas of tension from causing problems for your team or your client.

Time and Materials or Fixed Cost: A chart

The following table will help you decide whether you should offer your client a Time and Materials or Fixed Cost proposal. The biggest reason for choosing a T&M approach is that it allows everyone to focus on the success of the project, not the scope of the project.

 

Qualities of the ProjectFixed CostTime & Materials
TypeRedesigned Software New Software
Project SizeSmallLarge
Design TypeTemplate/Client-Provided Custom
RequirementsDefinedShifting
TimelineFixedFlexible
Project DriverContractClient
Client MeetingsFewMany
FeaturesSet in StoneChangeable
FlexibleNoYes
Client interactionLimitedInvolved
Project StakeholdersFewMany
Requirement ApproachFrozenSprints
Software MethodologyWaterfallAgile
Focus of EveryoneScope of the ProjectSuccess of the Project

 

In a T&M project, the client still receives an estimate and timeline for the project, but this timeline and budget is revisited with each Sprint (a Sprint is about 2-week period). You assure the client that the scope and budget is frozen during that time period.

The team works within that timeframe, with a clearly-stated price and number of hours. In Time and Materials transparency on both sides is key. No client wants to feel like they are signing a blank check, and no team wants to give away hours.

User-focused project

Working on a T&M project helps your team and the client focus on the success of the project together. This makes the focus not just on the cost and scope of the project, but on its ultimate success with the user. This means any aspect of the project is not approached with the question, “Did our original agreement include this expense?”
But rather, “What does the user want or really need?”

T&M not an option

If you have a client that has a set amount of money budgeted for a project, split the project into phases with separate contracts. The first phase will deal with requirements gathering and system design, including the wireframes.

Once that phase is complete, you will be in a much better position to properly estimate the effort required for the development phase. This will provide a fair assessment to the client on a tight budget, and give your team the space to decide if the project will pay off.

3 Immediate takeaways

  1. Before giving out another proposal, first, determine if a Time and Materials or Fixed Cost approach is actually better for the project. (see the table above). If a client is uninterested in T&M, then split Fixed-Cost projects into a scoping phase and a development phase
  2. Prepare your team to manage projects from a Time and Materials perspective.
  3. Restructure your pricing to make T&M more appealing to your clients.

Keep a balance between the aspects of a project that cause tension — budget, quality, and timeline. Assess whether your project is Time and Materials worthy, or small and limited enough to manage with a Fixed Cost approach. Don’t overestimate and be transparent with your client.

Our outsource development is done right. We create complex web and mobile applications. We bring together expert Indian developers – ranked among the top in their field – and India-based, American relationship managers, who provide stateside context for client’s needs and expectations. This combination creates a new kind of contracted development that doesn’t trade quality for cost.