Fixed Price or T&M?

Fixed price or T&M

Services cost money. But what is the best option to order? When deciding whether to implement projects as a fixed price or as part of Time & Material (T&M), there are a number of factors that should be taken into account.

Fixed price

In the case of a fixed-price project, the customer has the certainty that he will pay a fixed price for the previously defined scope of work after successful implementation and acceptance.

However, for the customer considerable costs incur in advance, because a specification sheet must be drawn up in which the requirements are specified in detail. Drawing up such a requirement specification is not trivial. Experience has shown that the more people involved in a project, the more complicated it is to precisely define the content.

As soon as the specifications are available, the service provider draws up a specification sheet in return which exactly defines the provisions and timeline to be fulfilled by the customer in order to be able to carry out the implementation within the specified period. In this phase there are often time-consuming "question and answer rounds" between the parties until all ambiguities have been resolved. The estimate can then be carried out and submitted.

Of course, not only the actually expected implementation costs are included in the estimation, but also empirical values from other projects, estimation costs and, if necessary, a risk premium. These factors can "drive up" the price. Often assumptions have to be made due to a lack of information. Unforeseen things can happen in a software project, because no two projects are alike. And let's be honest, no one can define exact requirements down to the smallest detail.

As soon as the implementation of the actual project is started – usually after the time-consuming - preliminary work, there is strictly speaking no flexibility to consider any new requirements or changes to requirements due to the previously defined scope.

Such circumstances result in a change request, which in turn must be precisely defined, estimated and implemented as agreed. This process interrupts the development cycle and delays the project (a project delay also causes costs) because the developers have to estimate the effort. It can also happen that change requests are not only implemented after acceptance of the original fixed-price project, but during the project, which ultimately leads to a change in the initial acceptance criteria. All changes during a project must be documented. Because the longer a project lasts, the more likely it is that verbal agreements will either be forgotten or will be forgotten due to changes in the project team, at the customer and/or service provider.

Since fixed-price projects require a pre-defined scope of work and acceptance, accurate and time-consuming documentation is necessary during the project in order to avoid discrepancies regarding the project scope later on.

Time & Material

Requirements for T&M projects must also be defined in advance by the customer. Experience shows that requirements change in the course of a project. In contrast to fixed-price projects, T&M projects always offer the possibility of reacting promptly to changes in requirements and taking these into account.

Cost and time savings due to the omission of requirement specifications, estimates, exact documentation of changes in scope etc. can be productively used for development in T&M projects and ultimately lead to faster project completion.

In addition to the advantages of T&M already mentioned, it should be added that agile development according to SCRUM is possible here, thus ensuring regular delivery of increments after the sprints. Transparency is guaranteed not only by partial deliveries at the end of the sprint, but also by regular time sheets.

My conclusion

We don't want to diminish fixed-price projects. If necessary, we also handle projects as fixed-price. However, you have to be aware that fixed-price projects can always result in incalculable costs for both parties. In our experience, agile software development as T&M leads to success much faster and more cost-effectively than fixed-price projects, as the developers can concentrate on their strengths: this mainly includes development and not documentation or in scope/out of scope discussions.

In addition, the be-all and end-all of a successful project is mutual trust between contractor and client, as well as open and honest communication. See also my other blog article on the topic "View into the activities of a project manager"...