Time And Material vs Fixed Price Contract: A Detailed Comparison

The selection of a staff augmentation pricing model impacts the project scope, timeline, and profitability. The two most common staffing pricing models are – time & materials, and the fixed price model.

These pricing models offer distinct advantages, risks, and ideal use cases specific to your project’s scope, and flexibility. This blog will help you with a detailed comparison of time and material vs fixed price contracts allowing you to make an informed decision of which IT staff augmentation model to choose. 

So, let’s get started with a basic overview of these staffing contracts.

Time and Material vs Fixed Price: Basic Overview

The time and materials (T&M) contract refers to billing clients based on the hours spent working, and resources allocated to complete the job. 

Fixed price contract, as the name suggests, this IT staff augmentation pricing model helps clients with a fixed cost for an agreed-upon work, and duration. 

Time and Material vs Fixed Price Contract: Comparison

1. Project Scope

Project scope refers to the detailed documentation that outlines all the resources, deliverables, deadlines, and activities that will be executed to complete the project. 

The time and materials contract offers flexibility in the project scope. The project can be kicked off once an IT staff augmentation company, and the client agrees on a per-hour price for IT professionals who will work on the project. The client can make changes to the project scope according to the evolving requirements. 

Fixed price contract demands a well-defined project scope upfront. The IT staffing firm will evaluate the project scope, and provide you with an estimated cost for the project at the beginning. Once the contract is established, adjustments in the project scope will call for renegotiation or re-pricing. 

2. Risk Ownership

Time and material vs fixed price contract varies based on the risk ownership. 

In the T&M model, the risk ownership is shared between the augmented staff and the client. The client carries the risk of potential cost escalation due to changes in the project scope. Staffing companies risk underestimating the complexity of the tasks if more time is required to execute specific tasks than initially provisioned. Additionally, the timeline risks are client-owned, whereas the provider’s responsibility is maintaining the availability of the resources. 

In fixed-priced contracts, the risk ownership is the sole responsibility of the service provider. The service provider handles all the cost escalation, while the client ensures the specified milestones are met. Additionally, the timeline risks are providers’ responsibility including the buffer time to managing the unforeseen challenges. 

3. Client Control

Time & material contract offers high client control. The client has the flexibility to directly oversight the daily operations including task prioritization. In simple terms, the client has a granular control to oversee and manage all the operations of the augmented staff. Beyond this, the control is extended to technical decisions, adjusting project scope, implementing or modifying development methodologies, and reporting structures. 

In the fixed pricing model, the client has no or very limited involvement in day-to-day operations, they are more involved in oversights in the defined milestones, and deliverables. The client has control over accepting or rejecting the deliverable that failed to meet specified standards outlined in the project scope. In simple terms, the client has complete control over the outcome rather than the process. 

4. Exit Strategies & Potential Costs

Exit strategy refers to the flexibility of terminating the staff augmentation contract, due to changes in the project, or the service provider’s failure to meet specific requirements. 

Time & material offer great flexibility in terminating or pausing the contract at any time. You only have to pay for the hours worked, and resources utilized with no obligation for future plans. 

Fixed pricing contracts are structured and involve significant contract obligations for early termination. It would be the best practice to refer to the contract to know about the conditions for early termination. Choose the right IT staffing company with transparent contract terms to ensure you have well-defined terms & conditions avoiding any scope of disagreements in the future. 

5. Scalability

Scalability refers to the flexibility of increasing or decreasing the number of resources working on the project as needed,

Time and material contract offers complete flexibility for both horizontal (scaling out) and vertical (scaling up) team restructuring. In simple terms, you can hire more staff with similar skill sets to manage the increased workload or urgent deadline or add more specialized skills to manage complexity.

A fixed price contract has a predetermined team structure, therefore limited scalability to make changes. Changes in the team structure require formal change requests and are often subject to approval from service providers. 

Time and Material vs Fixed Price: Which One to Choose?

The choice between time and material contracts vs fixed price contracts is subject to your requirements. This blog helped you with the decision matrix making it easier to find out the ideal use case of each contract. 

If you are still facing the dilemma of deciding which one to choose, let’s connect with the IT staff augmentation companies. These companies will evaluate your requirements, and help you to choose the contract that aligns with your project requirements in the long run. Smart IT Staff is a staff augmentation company with 400+ in-house teams of IT professionals with expertise to work across platforms like Salesforce, ServiceNow, Nintex,  AWS, Microsoft Azure, and Google Cloud. Beyond augmentation services, we have a consultative approach helping clients choose the best approaches that work for our clients in the long run.