Which billing model to choose with the IT company? We discuss FP, T&M, FBSC.


20 February 2018 - 4 min. to read

Inexperienced, often less aware customers will insist in their belief that Fixed Price is the best way to settle. They will know the final price of the product at the beginning of the cooperation. The scope of work is well established (they know what they want to do!). Does it really work?

In 95% of cases the software that the customer intends to create is so complex that it is difficult to measure it, moreover, it is also missing the exact product specification. Traditional, most used finance models are so-called. “Fixed Price” and “Time and materials”. Studio Software additionally uses a modern method called “Fixed budget, Scope-controlled”. How do individual methods work?

Fixed Price

It is a model in which a fixed price for a project is set at the negotiation stage, including detailed scope and schedule. As a precaution, the plan and specifications are not subsequently changed. In this strategy, the development company takes on all the financial risk of the project, which is committed to perform at a fixed price. Unfortunately, often these risks affect the price and, in the case of underestimation, the quality of the software is inferior. In addition, it is true that it is almost impossible to know the detailed and complete product specifications before starting work. Further developments during the project may be the subject of a dispute as to whether the change is included in the agreed price or not. This strategy is often a strategy aimed at the elimination of  the customer’s financial risk; Unfortunately, it often introduces a new risk – setting the price and hence the scope of the project, we risk building the wrong product or the product that does not meet the needs of the target group. Some cope with this by introducing the so-called The budget for the change, which unfortunately is not always enough to make the necessary modifications.

Time and Material

It’s a model in which a customer pays for actually worked hours by the development team based on their work cards. This brings a lot of benefits – the customer has the freedom to change the design specifications (and it’s very important – new ideas come up, for example, from a developer team, or a client changes his mind about some functionality, pays for actual time worked rather than initial (usually overestimated) estimate as for “fixed price”. The risk on the client side, however, is slightly higher, as some software companies do not control the budget and may be less effective (so choose an experienced company that has done at least several Time and Material projects). The client may also be reluctant to make changes to the project, trying not to exceed the estimated initial times given by the contractor (some companies even agree not to analyze all changes having been paid for an hour). In addition, a non-technical customer can easily be maneuvered, because he is often told “it takes that long”, and in addition, the company executing the order can work slowly and generate costs. In “Time and Material” there is often less emphasis on product analysis and the creation of good prototypes, because “everything can change later”.

In our opinion, the choice between these two methods of financing depends mainly on the trust that the client and the contractor share. With such confidence and certainty that the company will work diligently for the project, “Time and material” is a much better choice – less formalities, more focus on efficient work, lower costs, better product. As the statistics show, more than 37% of T & M projects in relation to FP projects are accomplished with success. However, if the customer does not know the contractor well or does not trust him – the “fixed price” option will be safer. An interesting approach is when working with an unknown executive company starts with the “fixed price” model and with time and confidence turns into “time and material”.

Fixed Budget, Scope-Controlled

This method, relatively young, is recently emerging at Studio Software as a preferred collaborative model. It allows us to build better projects respecting budget discipline. In this strategy we devote time to work together with the client at the beginning of cooperation to get a good understanding of the project. Based on this information and our programming expertise, we jointly set a budget and schedule. With this approach, we have the opportunity to make changes to the project without changing the time or budget – we only change the scope of work by prioritizing individual tasks. We focus on creating the best product under a fixed budget. Close cooperation with the client and weekly meetings to discuss the project’s status, allow you to monitor the financial condition of the project, making it feel comfortable and influencing product development. After all, you can reduce the complexity of individual features, get rid of less essential functionality, or transfer those insignificant ones to a newer version to fit in the budget. This funding strategy helps us to work with the client, the risk is better managed and does not fall on only one entity. Working together, feeling free to make changes, and having up-to-date information to manage the scope, helps us create a much better product.

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