When outsourcing web development, choosing the right contractual arrangement is essential. A wrong decision can lead to tough consequences such as a major issue with project budget, quality, and timeline. Many merchants end up experiencing headache after headache without getting their projects completed.
Most development partners offer one of two pricing model options: fixed-price or time and materials. Both models have their pros and cons, and depending on the project, one may make better sense over the other.
The following compares the two pricing models so merchants can better understand the difference between fixed-price vs time and material and why each has their time and place.
The Fixed-Price Model
A fixed-price agreement sets an agreed upon price for the completion of an entire project. There are two characteristics of this project type necessary for it to work. First, the parameters and requirements for the project are clear from the beginning. Second, the process for making scope (requirement) adjustments is very clear. Small or very repeatable projects work well with this model.
Fixed-Price Model Advantages
Organized
Due to fixed-price projects being completed under clear requirements and set deadlines, projects are more organized and easily manageable. Generally, project payment timing is agreed upon ahead of time and based on the percentage of work completed, which requires minimal management from the merchants perspective when expectations are laid out. Further, day-to-day tasks are set from the beginning to ensure delivery and to meet deadlines.
No Surprises
Perhaps the best part of fixed-price budgets is that there is little to no guesswork for pricing. Fixed-price contracts are predictable. With a fixed-price contract, requirements and set deadlines leave little room for surprises. Further, fixed-price contracts are generally budget-friendly. For many smaller eCommerce businesses, knowing the cost ahead of time makes it much easier to complete projects on budget.
Fixed-Price Model Disadvantages
Inflexible
A fixed-price model leaves little room for flexibility which is essential for successful eCommerce development. Merchants may realize the original plan needs to be revised and edited. With a fixed-price agreement, scope changes can be complicated and costly to manage since they require much more time to review and process.
Quality
Fixed-price development projects, by definition, are done on a budget. The developer or partner must complete the project within a specific timeframe. But even if the project does not have a strict time frame, it still benefits the developer to finish the project quickly to be profitable. Some developers may rush, take shortcuts or agree to projects without understanding the full scope and complexity.
Lastly, if the final result is of subpar quality, business owners will need to pay additional fees to the current developer to fix the project, settle for the current state of the website, or hire a new developer. In fact, many fixed-price projects end up in a state of “abandoned in design.” Often, the scope of work turns out to be much greater than initially estimated and the developer is forced to walk away from the project. Generally, due to not having the resources to fix all the bugs resulting from the shortcuts taken to deliver the agreed-upon scope.
The Time and Materials Model
A time and materials agreement generally involves an estimate from a developer or agency. The budget is not agreed upon ahead of time. Instead, the merchant receives a bill for an hourly rate for the duration scheduled by the developer. The final cost of the project is for how many hours it took the developer to do the work and the cost of any additional materials that were needed.
There are many more advantages associated with the time and material model when building eCommerce websites. Time and material projects are still very custom and the template is not as repeatable as say, for example, building a house.
Time and Material Advantages
Flexibility
Many would agree that a significant advantage of the time and materials model would be the flexibility of the process. As projects progress, objectives and needs often change. Further, when a merchant changes their mind during development, additional features can be improved. In other words, as the scope of the project changes and evolves, the development work can shift with it. For example, features can be added or removed halfway through a project. In general, the developer’s goal is to ensure the client is happy and the project is complete. With time and materials contracts, developers tend to not rush to the finish line hoping the job comes together.
Timeliness
With time and material pricing, merchants do not have to go through an RFP or bidding process. Business owners can quickly interview a developer or agency to discover hourly rates, certifications, and experience. The time and materials approach will help save time and allow most merchants to begin immediately. Further, time and materials contracts should provide detail to include the time spent on each feature. Transparency allows both the merchant and the development partner to stay on the same page and working towards the final goal.
Cost Savings
Time and material projects tend to deliver more value per feature than fixed-price projects. Due to the enhanced efficiency of the time and materials development process since the change order process does not hinder it. Also, the quality of the initial code build is often higher on a time and materials project since the development team is not being pushed to cut corners. High quality leads to cost savings over time since there are less bug and performance issues to resolve.
Time and Material Disadvantages
Time Commitment
With a time and materials pricing model, merchants must be willing to be an active participant in the development process. At the beginning of the project, it is crucial to lay out necessary features, the vision of the project and any business issues that will need to be resolving in the final project.
This type of communication provides the developer with a deep understanding of what the client needs to have at least a Minimum Viable Product (MVP) at the end of the project and allows the developer to provide feedback and suggestions for optimizations and functionality that the project could, or should, have. Then, over the course of the project, the developer will send regular updates about the progress of the project and require feedback from the merchant. While this aspect allows for flexibility and transparency, there will be a significant input and commitment expected from the merchant or client.
Budget Changes
With a time and materials pricing model it can be difficult to estimate what the final cost of the development project will be. In some cases, a merchant will require easily implemented features. For others, the project may be much more involved than initially anticipated. Initial estimates may change as additional features need extra development hours.
Which is the Best Choice or Which Seems Like the Less Risky Option?
Experience has shown us that for many Magento development projects that the time and material pricing model is often the best choice. Many times, fixed-rate contracts lead to a low quality finished product which creates a lower ROI and long-term bug and performance fix costs (technical debt). During the development phase of a project, the client is generally responsible for resolving any unexpected issues that arise that weren’t part of the original scope of work. Further, with a fixed-rate model, the developer makes a more substantial profit with fast completion. Quick completion undoubtedly causes a rushed job and cut corners.
An unknown budget or even one with an investment range may seem daunting. However, if merchants partner with a trustworthy and experienced developer, the developer will provide regular budget updates and even agree to put a hold on work at the end of an hourly limit before project completion. Additionally, the lack of fixed-time constraints means that the developer can provide the best job possible given the agreed upon budget constraints.
And then there is the time commitment. It is true that a time and material pricing model does require business owners to be heavily involved. This should be considered a good thing. Involved merchants can be sure that when the final product is complete, it will be exactly as required.
While each pricing model for website development has its pros and cons, the best way to decide between the two is to base it on which one will best suit the needs of the merchant company and the format of the project.
Contact us to learn more about our development processes and how we work with our clients.