When choosing payment models for software development outsourcing, including Fixed Cost, Time and Material (T&M), it involves more than just considering financial benefits and risks. The outsourcing payment model often determines the nature of your collaboration with the vendor and the going of the project.
To help you decide which payment model is the best fit for your outsourcing endeavor, we examine the two most popular types of outsourcing payment in this article. When you are ready to find a contractor to complete your project, please feel free to check out our software outsourcing offers.
Which model should you choose?
We think that there is no concrete statement about which model is the best, as what to choose depends on the details of your project. We’ve compiled the information below that we often discuss with Trustify Technology‘s customers to help them decide on a payment model.
Fixed price model
For fixed price projects, the outsourcing vendor draws up a contract in which the entire scope of work is specified, including a delivery time-lines. A fixed price contract with estimated costs and defined schedules follows a waterfall development process where each phase is executed after the previous phase is completed. You pay the fees in installments based on the progress of the project. Billing hours are usually set according to the mile-stones and duration of the project.
Advantages:
- Costs and timeline transparency: You know from the beginning how much you have to pay and when the project ends. The fixed price contract is often useful when you have a limited budget and/or a short timeline.
- Clear Project Results: At the start of a project, you understand what your software will be capable of, in terms of features and functionalities. So you have the option to make it part of your business strategy (e.g. business process evaluation).
- Minimized management efforts. Your participation in the project will be required the most at the planning stage. Once the project begins, you will have more flexibility and you can limit your participation to just progress meetings and scope checks.
Disadvantages
- The project got off to a slow start. This is because fixed cost projects require detailed specifications. So the time it takes can be weeks or months, depending on the complexity of the software solutions.
- Project requirements are highly difficult to change. Any changes you want to incorporate later in the project (for example, due to changes in the market or your business model) will need to be consulted and paid for. And this can significantly hinder the project progress.
- Software cannot be tested before development completion. Even if you directly manage the development team. You won’t be able to see the app in live production until it reaches the final stages of development. It’s hard to make sure that it meets your expectations. Fixing any defects at the final stage can ultimately be an expensive process. In some cases, tackling a lengthy testing process can turn the project into a whole new one.
When to Opt for the Fixed-price model?
We recommend customers opt for fixed price contracts for small and medium-scale projects with a term of less than 1 to 3 months. At Trustify Technology, we also use this method for PoCs and MVPs development because it helps companies to determine whether the software concept can be tested in practice.
Time and material (T&M) model
Under the time and material model, you are billed for the actual time spent on the development efforts according to an hourly rate for each expert directly working on the development project. If the development projects are based on time and material models, it’s very likely to be Agile-oriented. Thus, vendors usually issue monthly invoices along with reports summarizing the work performed.
Advantages
- Adapt to the circumstances. You collaborate with the vendor and work on formulating a project roadmap along with the milestones. But the model allows for flexibility, with the scope of work can change if necessary. You can make informed decisions about the next stage of development based on past results including end user feedback and analysis of new business conditions.
- Start projects faster. The planning process is shorter than for fixed cost projects. This is because there is no need to specify the project requirements in detail. This allows you to start software development earlier.
- Effective Software QA. Within T&M, continuous testing is performed to verify the implementation of requested changes and new features. Therefore, the software is optimized for success over multiple iterations of the project.
Disadvantages
- Budgets and timelines are uncertain. The final costs of the project, under T&M may exceed the initial budget. One way to increase transparency is to measure team progress using KPIs that enable the forecast and plan the scope of work more precisely over time.
- Increased management effort. Although the T&M process gives you control over deliverables, you still need to allocate sufficient resources to work with the vendor, and provide feedback to keep a steady development flow.
When to opt for the T&M model?
We recommend using this model for medium to large scale software development projects with flexible requirements. However, your involvement in the management of the project can range from regular approval for subsequent iterations to close collaboration in defining the plan.
The time and materials model also works well with other outsourcing partnership models – such as IT staff augmentation and dedicated teams. This is because you can determine the exact number of external experts needed for your project and adjust the workload (and therefore the cost) on a daily/weekly basis.
Check out our in-depth article on IT outsourcing models to learn more about these types of outsourcing partnership.
To choose the right payment model, you can take into considerations:
- The time and budget you can spend (fixed or somewhat flexible).
- Your vision for the software (clearly defined or tentative).
- The scale of the project (small, medium or large).
- How much involvement you want and can afford (periodically check-ins or close collaboration).
- The influence of other factors such as market changes may have on your project.