What is the best pricing structure for a web project? It’s a question that comes up again and again.
The primary concern is around risk, but the choice also has other implications on a project. What we’re looking for is to find a structure that minimises potential conflicts and risk, in a win-win situation for both client and developer.
In this article, I’ll examine the two most popular pricing options – “fixed price” and “time and materials” – from the clients perspective. We’ll look at the pros and cons of each, and some of the factors that make one more suitable than the other.
Choose a fixed price if the project is small and the requirements are known. Large, flexible projects can benefit from a time and materials contract.
In this article
- Fixed price contracts
- Time and materials contracts
- The hybrid approach
- Other pricing models
What is a “fixed-price” contract?
A fixed price contract, also known as ‘project-based’ or ‘flat-fee’, is one where the total cost of the project is agreed in advance – before any work takes place. Another definition, this time from Wikipedia, states:
A fixed-price contract is a type of contract where the payment amount does not depend on resources used or time expended.
Advantages of fixed-price
Fixed-price contracts are often favoured by clients because of the perceived reduction of risk. The price is agreed up-front, along with the specification for the work, transferring the risk of delivering the project to the developer. If the specification of the project takes longer than expected, the developer absorbs the impact.
- Predictable costs. From the beginning, it is clear what you are getting for the money you are spending.
- Planning made easier. As the outcomes are fixed, it is easier to set deadlines and milestones, making the whole project more predictable and manageable.
- Less client involvement. Once the developer knows the requirements they can develop without as much interaction with the client.
Disadvantages of fixed-price
The reality of most web projects is that clients don’t know if they have asked for the right thing until they see it built and can actually use it. Therefore the biggest issue is usually around project scope and change requests.
- Lack of flexibility. A fixed-price project has a defined scope (requirements). As the cost cannot change, the scope of work is much less flexible. Requirements develop over time, as functionality becomes more clear and this can cause conflicts and delays. Good developers will want to build you the best possible solution, but a fixed-price project can hamper their ability to do this. Fixed-price projects are not well-suited to projects that cannot compromise on features and quality.
- Writing specifications is hard and takes a lot of time. Thinking through all the details of a project in advance is time-consuming, even if you are an expert and have done it a hundred times before. It’s reasonable to expect that expertise from developers, but writing a specification has to be a collaboration and time dedicated to it up front by you, the client.
- Wasted time negotiating change. If requirements do change during a project, and in 99% of cases there will be some change, time that could otherwise be spent building your site gets sucked into negotiating instead.
- Less client involvement. Also a potential advantage (see above), the reduced need for client involvement once the specification has been agreed can result in isolated development where the end product, although it technically meets the requirements, does not meet the client expectations.
When to use fixed-price contracts
Fixed-price contracts are ideal for the following projects:
- Fixed and detailed specification. If a project has very clearly defined specification, a fixed-price project can work well. For example, a project that already has a working wireframe or prototype.
- Small. Smaller projects lend themselves well to fixed-price because estimating the effort involved is easier and the risk is smaller.
- Repeatable. If a developer has delivered a very similar project before, then it is easier to accurately estimate the time involved. They will also have the experience to flag up potential roadblocks that the client may not have considered. “Productised services” lend themselves well to this model.
- Limited budgets. If a client has a very tight budget limit, then fixed-price can help ensure that the project is delivered within that budget, but compromises must be possible regarding the quality of what is built
- Fixed deadlines. Similar to budgets, fixed-price projects can help to ensure that deadlines are met.
Time and materials contracts
What is a time and materials contract?
[a project] in which the employer agrees to pay the contractor based upon the time spent by the contractor’s employees and subcontractors employees to perform the work, and for materials used in the construction
Also known as a ‘cost-plus’ or T&M, a time and materials contract is where a client agrees to pay for the time and cost of materials involved in the completion of the project. The time-based cost will be based on a contractor’s rates, for example, a day rate or an hourly rate. The “materials” cost will be the expenses incurred by the developer during the project, for example, software licenses, domain name registration, photography, etc.
Advantages of ‘time and materials’
The main advantage of a time and materials contract is that it allows for flexibility in the project.
More often than not, as a project progresses new ideas, previously unconsidered issues, and uncommunicated assumptions will arise. A time and materials contract is built to be flexible enough to handle these scenarios.
- Flexibility. The flexibility of a time and materials contract means that you are more likely to get the project that you need, rather than the one that you thought you wanted at the start. During the project, changes and decisions can be made that improve the end product.
- Less conflict. Without the ‘scope-creep’ discussions, a T&M project keeps everyone focused on the project goals and not debating over what is in or out of scope.
- Time savings. T&M projects don’t require as formal a ‘change request’ process – which can involve discovery, estimation, negotiation, etc. Instead, a more agile approach can be taken with quick tests and iterations.
- Prioritisation. A T&M contract encourages teams to prioritise tasks. This means that the most important, mission-critical, tasks are tackled first, and less important, but potentially tricky tasks don’t derail the project.
- High level of client involvement. Working in a flexible way means that there needs to be more involvement from the client. This is to discuss ideas, priorities and progress. By working closely, the client and development teams are more likely to have the same assumptions and expectations, and a more harmonious relationship which results in a better project all around.
Disadvantages of ‘time and materials’
The most obvious disadvantage is the risk that the project will be much more expensive and time-consuming than anticipated.
- Cost unpredictability. Without knowing exactly what will be built, it’s impossible to accurately estimate the total cost involved at the start. This can lead to costs that go beyond the original expectations.
- Time overruns. As with cost, being unable to accurately estimate time means that the project may be delivered long after expected. This can be avoided by good management and prioritisation of tasks.
- High level of client involvement. We prefer to see this as an advantage (see above) but some clients may not have the internal resources nor skills needed to keep the project moving efficiently.
When to use ‘time and materials’ contracts
Time and materials contracts are ideal for the following projects:
- Flexible requirements. If the scope and requirements of the project aren’t clear at the start, and/or they are likely to change, a T&M contract allows the project to adapt.
- Large. Bigger projects are much more difficult to estimate in advance and more susceptible to change along the way.
- New ideas. If this is a new type of project for either the developer or the client, then a T&M contract allows the team to adjust the scope as they learn.
- Long-term projects. When a project is ongoing and will change over time, a T&M contract will enable the project to continue without having to renegotiate.
- Trust and honesty. A key ingredient to a successful T&M project is that the client and development team trust each other. Clients should feel that their developers are efficient and have the skills to tackle the problems.
A hybrid approach
It’s possible to mix these two models in a hybrid approach. For example, maybe the design or prototyping phase of a project needs the flexibility of a T&M contract, but, once the design is complete, the development phase can use a fixed-price.
Or perhaps, part of a project is integrating a “Service A”, which the developer has done time and time again, but they also have to integrate “Service Z” with which they have no experience. The developer might suggest a fixed-price for the integration of “Service A” and T&M for “Service Z”.
Other pricing models
‘Fixed-price’, ‘time and materials’, and ‘hybrid’ aren’t the only pricing models. There are also:
- Retainer pricing
- Value-based pricing
- Package pricing
- Performance-based pricing
- Equity pricing
Fixed-price or time and materials? Which is best for your project?
As always, it depends on your individual circumstances and experiences of commissioning web development.
In our experience, the flexibility and agility of a T&M project usually leads to the smoothest relationships and the best end results. However, some projects and clients are well suited to fixed-price, so we’ll use the model that is most appropriate given the circumstances.
If you have any questions on the best model for your project or if you’d like to discuss the ideas in this article, email me at email@example.com or tweet @keithdevon.