Are you wondering what are the advantages of time and material contracts, and how they compare to other options? If yes, the various facts about these two factors discussed below will definitely assist you choose wisely the right option for your project. Several years ago outsourcing agreements were built courtesy of fixed price model.
However, recently time and material business model is commonly used due to the various pros it carries along. Selecting the appropriate pricing contract can turn to be a hectic endeavor most especially when you want it to fit the contracted needs, operating processes as well as goals of your firm. Be informed that in addition to these two options, hybrids and combinations can also be an ideal alternative.
Fixed Price vs. Time and materials
Fixed price agreement refers to a single- sum contract whereby the service provider is supposed to complete the project assigned using the amount set in the agreement. This option is recommended especially when the requirements specifications as well as rates can be predicted or figured out easily. The client is supposed to provide his/ her own views so that developers can offer services and/ or products that will suit his or her own needs in the long run.
The various circumstances that makes fixed price contract appropriate include:
- Handling small tasks having limited project scope
- On a limited or fixed budget
- When you are offered clear requirements and on set deadlines
Time and material contract is whereby actual work done payments are based on hourly rates. In addition to sorting out costs of materials, customers are entitled to pay service providers based on the amount of time spent on a particular project. Consider using time and material contract when under any of the following circumstances:
- The scope of the project is not determined properly
- In case your project is a long term one and is accompanied by dynamic requirements
- You are in need of flexibility in order to vary the workloads or modify the scope of the project
Pros of Fixed Price Agreement
#1: Predictability
Fixed price agreement is an ideal option especially when the project is a predictable one. This option provides clients with time to set clear deadlines and figure out the exact amount to be utilized on the task to be completed.
#2: Transparency
With prearranged deadlines, fixed budget as well as specified requirements set, the project will be handled as agreed with no possibility of being misled or conned by the service providers.
Cons of Fixed Price Agreement
#1: Lack of Flexibility
This form of agreement will make you liable for any emergent situations in case they arise.
Pros of Time- and- Material Agreement
#1: Flexibility
This form of agreement allows clients to change or modify the project at hand as they desire.
#2: Better Timing
Choosing time and - material agreement over fixed- price will assist you save time and consider the project to be completed within the shortest time possible.
Cons of Time and Material Agreement
#1: Poor Budgeting Plan
If you’re not careful, the entire cost for the project may end up rising beyond what you initially had budgeted for.
Ensure you carry out your homework first and put into consideration the various demerits and merits associated with these price contract options before deciding which one to liaise with. The advantages of time and material contracts are worth comparing to those of a fixed price agreement.