Time-and-Materials vs Fixed Price vs Milestone pricing models

Both customer and company are interested in choosing the beneficial type of pricing model. Over the broad experience on the market, we’ve figured out three types of pricing contracts for IT projects. There are time and material pricing, fixed price project and milestone contract. Let’s agree that all of the projects differ. Different types of contracts suit different projects. We want to share with you our experience in this article. Keep reading to discover the best pricing model for your project.

Fixed price contract

You will be surprised, that it’s possible to fix the price of the project. Keep reading to figure out how price can be fixed. Fixed price model implies estimation of the particular project and amount of work to be done, based on customer requirements. Depending on the amount of work, the company calculates custom software development services hours required to complete all the tasks. So, the project scope is written before the development starts and has strict deadlines.

After the estimation, the company sets the price for the project. This price is fixed and can be paid partially, or one time. A fixed scope may seem inconvenient, but don’t worry. Actually, some changes are possible. Although the fixed scope, it may turn out that some vital features are missing. The development company will implement them, but keep in mind, that it’ll increase the cost and time of development. Based on the above, let’s define fixed price contract pros and cons.

When to use a fixed price contract:

Despite all the fixed price contracts pros and cons, this model is suitable for the following projects:

  • First of all short-term projects with several essential features.
  • The next option is MVP (minimum valuable product). If you build MVP application with a limited budget and need basic features at first.
  • Time limits are one more reason to choose a fixed price contract because it implies fixed time too.
  • If the project is well-specified in advance and you don’t need any changes in scope.

If you’ve identified your project in four types of projects above, then you’re the lucky one! Contact us to figure out the fixed price for your project.

Time and material contract

Time and material contract in contrast to a fixed cost contract has a more flexible schedule and budget. Keep reading to find out the top four advantages of time and material contract. Time and material pricing formula implies established payments for development time. Customer pays for actual hours spent on development and for the completed amount of work. A customer and a company negotiate rate per hour.

Payments are usually interval: daily, weekly, monthly, etc. Project timeline and budget are estimated approximately for time and material pricing model. This model is flexible, and changes are welcome, but it’s not fixed in time and budget. The customer is fully immersed in the process at all stages because it’s an ongoing collaboration throughout all phases of a project. Let’s dig into dipper and highlight time and material pricing formula advantages and disadvantages.

When to use time and material contract

Now is the most exciting part — types of projects for the time and materials model:

  • Long-term projects. Preparing specifications in advance for them is impossible. They need to be flexible to make changes and add features in the future.
  • It’s not easy to create specs for complex projects too. Something is always will be missing, so it’s better to choose a time and materials billing model.

If you have a limited budget but need a long-term or a complex project, then we have a solution for you. Time & materials contract with a cap! It’s a subtype of time and materials billing model that includes a budget limit. A customer and a company set budget maximum, so the final cost will not exceed the maximum. It helps to plan expenses more carefully.

Milestone contract

Milestone contract includes regular payments for accomplished milestones. Customer and development team set benchmarks together. As a rule, a customer pays, at fixed points, when the required tasks completed. Payment is determined by time spent on development and amount of work. A customer pays for actual work done. Trusted relationships between a customer and a company are preferable, in case of arising disputes.

Isn’t it fantastic? But there are some minuses. Read the following ups and downs of a milestone contract:

When to use milestone contract

This is the most useful part for you — when to choose milestone billing:

  • Long-term projects with complex scope, which usually are building gradually.
  • If it’s not your first project with the company and you have trusted relationships, then a milestone contract is a good option.
  • If the quality above all for you, then milestone billing is what you need. You’ll have an opportunity to check if everything is perfect before charging.

Fixed price agreement vs. time and material contract vs. milestone contract pros and cons:

The best billing model is the one that meets your expectations. We’ve prepared for you this simple comparative table of time and materials vs. fixed price vs. milestone contracts. This table will help you to determine what you expect from your project and to choose the best billing model.

Conclusion

Let’s sum up. The most common pricing models are fixed price contract, time&materials contract and milestone contract. Each of them has advantages and disadvantages and are suitable for different projects.

  • A short and simple project = fixed price contract.
  • Long-term and complex project = time&materials contract\milestone contract.
  • Flexible and high quality = time&materials contract\milestone contract.

If you have any further questions or want to discuss your project, feel free to contact us.

LANARS Founder, Entrepreneur, Proud dad. Working in IT industry for near 10 years. Run a tech company presented in Ukraine, Norway and Georgia.

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