How to Best Pay Your IT Vendors? Fixed Cost, Hourly Payment Or…
Among the first steps undertaken for a project to kickoff is finding an ideal development company. The question on how to pay contractors and sub-contractors then arises. The two common options that a client has are the hourly collaboration (also known as Time and material’) and fixed price models. Over the years the middle ground has been found with the hybrid system that involves elements of the two standard models. This model comes highly recommended due to the flexibility it offers the parties involved. It tries to strike a balance between hourly and fixed without upsetting the dynamics of the project at hand. Many clients have noted that the hybrid models work best for them and development companies have also adjusted to accommodate this system as well.
What is important to have in mind is the pros and cons of the various contract models available. The type of project, time available, and availability of the development resources are among the factors that should be considered before one decides on the contract model to work with.
Fixed Price Contract Model
Fixed price contract is ideal when one is sure of what he wants and has an idea of how the desired results will be achieved with the detailed technical specification. The price of the services rendered is not subject to change unless special circumstance clauses are included in the contract.
The advantages of using this model are
Before the contract is signed, the fixed price offer is negotiated and agreed upon. Both the client and development company understand what they are getting into regarding finances.
- Timeframes and deadlines
During negotiations, the time expected for the project to be complete is indicated and the duration for each task gets clearly outlined.
- Monitoring and evaluation
Assessment of the project progress can be done while it is underway because the various milestones to be met are outlined before the project is set in motion.
- Minimal supervision
All details of a project are defined in the contract giving the development company a blueprint to work with.
There are various cons of using the fixed price contract. Some of the common ones are
- Estimation Complexity of Big Projects
Making estimates for complex projects is itself a big project. There are many factors to consider and the availability of the technical documentation does not imply changes are not going to be implemented.
- Price Increase
When setting the price, estimators intentionally budget for emergencies and unexpected situations like wrong estimation or internal bottlenecks. This inevitably results in a higher cost of the project.
- Overestimated Deadlines
When evaluating a project duration, teams include more time into the plan to ensure timely execution. Two-thirds of projects statistically overrun the deadline even given good planning.
We recommend going for a fixed price contract when developing a minimum viable product (MVP) with the work scope well-defined and presented with mockups/wireframes. This allows checking the vendor’s work quality and build trust before launching into the less time-consuming mode of fixing the budget.
Hourly Collaboration Contract Model
The hourly collaboration method works best when the development is carried out with little or no technical specifications at the beginning and the requirements are subject to change over the course of the project. The hourly limit can be set for daily, weekly, or monthly depending on the agreement reached.
The upsides of choosing hourly collaboration are plenty. Here are some of them:
- Changes are allowed after the project has kicked off
Given the nature of this type of contract, it is possible for the client to give the development company a new set of instructions while the project is underway.
- Development can start almost instantly
With the hourly collaboration method, the development process can kick off as soon as an agreement is reached and first main functionality is discussed.
- The size of the development team can be increased
The hourly collaboration contract model allows for the expansion of the development team if the client requires that it be done for whatever reason.
There are other pros of using the hourly collaboration contract that one can find as soon as they start using it. However, it would be unwise to assume that this project model is devoid of disadvantages. Some that are noteworthy ones include
- Nonstandard work
Receiving work that is not up to standards is among challenges that an individual or a company may experience if they decide to go with the hourly collaboration package. This issue is prevalent in first-time interactions. It is important, therefore, to make sure that the company has dealt with the similar-sized projects and can showcase high work standards before deciding to use the hourly collaboration system.
- No Clearly Defined Budget Planning
Development requirements are quite often a subject to changes. Therefore, it gets quite hard to set aside a certain budget ahead of time.
- Developers’ Performance Speed Unavailable
The development velocity varies for different development companies and the undertaking may end up pricier than anticipated.
Time and material model is not as risky as people may think. If the development company has proven its expertise and transparency, it saves up a bunch of time on constant estimations. With this followed, the final cost remains the same within a shorter time frame compared to the fixed contract.
Having a dilemma on which contract model to use? Trying out the hybrid model may be the solution. Using both of the abovementioned methods at different stages helps the client achieve their objectives with minimal hassle and build trust. Most often, the first milestone is carried out at a fixed rate. Later on, the project is billed on an hourly basis. Picking out the good and workable features of the standard contract models and blending them into a hybrid model is a lasting solution to contract dilemmas.
Attract Group has had clients opting for each of these options. We can help you make a wise decision regarding the billing model to help you achieve what you want without wasting your budget. If you have a business goal, we will help you achieve it with the solution that will give you a headstart.