Time-and-materials contract vs. fixed-price

Partnering with other teams is a good option when developing a tech product. But are you aware of the different kinds of contracts you can harness when doing so? The contract must suit your project seamlessly, so you make sure you leave less room for losses and the team you hire has what it needs to thrive. Here we’ll discuss the two most used contracts when developing products: time-and-material and fixed-price models.

 

How do we work and why do we prefer a time-and-materials model? 

First of all, we need to explore how we work. We usually get our clients from just an idea to a real product. To do so, we start with the stage of product discovery. We make sure that the problem and opportunity are crystal clear by, for example, doing some market research and exploring user stories. This process takes around two weeks.

Why is product discovery important? Because it’s the stage that will bring us the input we need from customers to develop products that are truly helpful for them. Our clients get to know the problems they’re dealing with and better think about how your product will solve them. Fully understanding the target audience means that our clients leave less room for wasting valuable resources creating projects that are not that valuable for their users.

Even when it’s launched to market, in the product insights stage, product discovery can help. This stage will fuel you with metrics and user feedback so you make product adjustments in time if needed.

Our way of working and the services we offer demand flexibility and agility. Can you imagine a product discovery that’s not flexible enough to explore users’ needs and make changes before development?

That’s one of the reasons why, at Eagerworks, we work with a time-and-materials model. Plus, keep in mind that we team up with startups and, as you may know, they tend to be in uncertain lands and look for teams that quickly embrace flexibility.

It’s impossible to acknowledge all the functionalities and user flows at first sight, no matter how good the design research and discovery stages are. A time-and-materials contract lets us adapt to new project requirements as soon as possible and boost the value we provide to our clients. If they are ready to create a product that better suits their users' needs and not their initial strategies, then they’re ready to thrive.

 

Choosing your partner and your contract: time-and-material vs fixed-price models.

Fixed-price contracts have a specific price before the work starts. This means that the amount that will be paid is clear for both the hiring and the contractor part. But what happens if the job specifications change when teams are working on your product? The arrangement needs to be settled again. You’ll do so by adding and negotiating an amendment to the original contract.

This type of contract comes with advantages and disadvantages. You have more predictability, and enjoy the ease of management. Still, it drives a lack of flexibility to face the challenges that tend to arise when developing a product and less accountability too.

A time-and-materials model has no fixed price but a “not-to-exceed” clause so you make sure that there’s a maximum price for your project and have no surprises with runaway costs. How do you set the amount that you have to pay if you don’t set a fixed price then? You agree to a fixed hourly wage.

In addition to that wage and the costs of materials, the time-and-materials contract also specifies the goal of the job and the finished product you want to receive. Plus, it has to describe general and administrative costs. Keep in mind that materials need to include freight and taxes.

If something changes and you have chosen a time-and-materials contract, no renegotiation or amendment is needed: you’ll only have to pay more in terms of working time and materials, but remember that you’ll have that “not-to-exceed” clause.

Let’s briefly check out the items that every time-and-materials contract should have:

• Hourly wages: labor rates should be included for workers, subcontractors, and administrators that are in charge of managing the project and billing.
• Materials markup: it’s usually between 15% and 35% and it means that you will pay for the costs of materials and a specified markup that’s around those percentages.
• Maximum labor hours: so you make sure you’re protected against runaway costs. If there’s a need to add more labor hours, the contractor must cover it.
• Not-to-exceed clause: so you’ll be able to know the maximum cost of the project before it even starts.
• Payment milestones: you’ll agree with your contractor on the payments you’ll make along the progress of your project.

 

Why should you choose a time-and-materials model?

The time-and-materials model comes with great pros:

• Flexibility. You can easily adapt to dynamic decision-making processes, work scope, and requirements.
• Transparency. By choosing this model, you can set a work scope with partial goals, so you have the option to pay as those goals are met.
• Quickly start. It’s faster to start working on the project.
• Better control over the project. You can get involved in the project with space to change what you consider needs to be changed.
• High efficiency of long-term projects. Remember that we talked about the upgraded services we offer after development? Well, this kind of contract lets developers better evolve projects, spending their time on what’s valuable for your project. They don’t just leave the project once the development stage is done.

Let’s stay a little bit on long-term projects. This kind of contract is especially useful when working on long-term projects with dynamic requirements with a scope that’s not fully understood yet and you need the flexibility to change it or modify the workloads. Plus, it’s really helpful for projects whose duration is unclear or with materials whose prices are likely to change.

A time-and-material contract is great in these situations because you’ll have the flexibility you need to adjust scopes, workloads, features, change directions, etc. It will also let us focus on each part of the process more precisely without worrying about having to take a look at the contract if a problem arises, while clients pay only for the hours we spend on each stage to make their projects thrive.

Want to know more about how we work at Eagerworks? Explore our way of working and services.