Now that you’ve decided to outsource your project, how should you decide how to pay for your vendor’s work? Two common business models are the Fixed Bid model and the Time and Materials model.
The Fixed Bid model is something that we are all very used to. You get a quotation for the requirements that you provide. Prices are fixed, so are the requirements. This is more commonly practiced using the Waterfall Methodology in software development.
Time and Materials essentially mean paying for a software developer’s time in building your software. This usually translates into an hourly or man-day charge. Time and Materials do not require a fixed scope to start with. The project is able to kick off with very high-level estimates and an overall project estimation of how much your software would cost. Naturally, the estimated cost could change over the course of development, depending on how you would like to manage the scope and extent of development. This is more commonly practised using the Agile Methodology in software development.
Let’s take a look at a few variations of a scenario to see how a time and materials project vs fixed bid could turn out.
Scenario: You are looking for a software with features A, B, C and D. Your Fixed Bid vendor quotes you $100,000 for these features while your Time and Materials vendor quotes you 100 man-days at $1000/man-day with an estimated project cost of $100,000.
Use Case 1: You decide you don’t need that many features.
Both vendors start work and you decide you do not need feature B.
Time and Materials: Your vendor has already completed feature A using 20 man-days. He goes ahead and completes feature C and D with 60 man-days. The total cost of your project for features A, C and D took 80 man-days and cost you $80,000 instead of $100,000. (Savings of $20,000)
Fixed Bid: Your vendor completes the remaining features with no change in price. The total cost of your project is still $100,000. (No savings)
Use Case 2: You want to change features
You decide you wish to modify feature B to B1.
Time and Materials: Your vendor gives you an estimate of the extra time taken to build B1 and lets you decide if you would like to go ahead with it. i.e. It will take 25 man-days to build B1 instead of 20 man-days for feature B. The total project cost is now $105,000. ($5,000 more)
Fixed Bid: Your vendor issues a change request and re-quotes you for feature B1. Feature B1 will cost you $25,000. The total project cost is now $125,000. ($25,000 more)
Use Case 3: The features are more complex than expected
The vendor underestimates the amount of work required for a particular feature and undercharges you.
Time and Materials: Feature A turned out to be more complex than required. The vendor will give you a heads up that Feature A might take x more man-days then expected. You can then decide if you would like to increase the budget or stick to the budget. If you would like to stick to the budget, you might have to reprioritize the features that you want to build. In some cases, the vendor may be able to present solutions to simplify the problem (i.e integrations to an existing application).
Fixed Bid: No change in project price.
Questions to ask before deciding on time and materials or fixed bid
Before deciding on embarking on a time and materials or fixed bid model, there are a few questions you could first consider:
Do you have a firm idea on the software you want to build?
Building software requires more than a general one-liner description of what you want to build. i.e CRM, E-commerce platform.
Some of the questions you can ask are:
- What are the features you expect?
- Who will be the users of the system?
- Will it be a SAAS platform?
- Are there any potential integrations?
These requirements can be captured in many ways, the most common being a Requirements Document for Waterfall Development or User stories for Agile Development. For the fixed bid model, prices are normally quoted based on this Requirements Document. Any change varying from this Requirements Document would be considered as a change request, which would be a separate charge.
How much risk are you willing to take?
For fixed bid models, you will know the cost upfront for the software that you want to build. Payment terms normally come in milestones, with an x% deposit upfront for development to start. Once payment is made, development starts and after y months, you will get to see a demo of your software.
If the software is exactly how you envisioned it to be, great, but if it is not, this is where the challenge begins. While it is not possible to redo the entire system, some fixes and changes can be accommodated. Even so, changes can be really complex and impact the rest of the system. More often than not, vendors are reluctant to make major changes as this might mean changing the architecture of the whole system. Many a time, these systems that you have no choice but to accept, end up being a system that does not meet your needs and a big white elephant in the room.
How much change do you anticipate in your development?
One big difference between Time and Materials and Fixed Bid is in the flexibility to make changes. Time and Materials is commonly practised in the Agile Methodology, which in the name itself, means agility in development. A good way to discern if there might be many changes in your software is the number of stakeholders involved. People do change their minds, and when more people is involved, the likelihood for changes is higher. Each stakeholder will have their own set of goals to achieve, and will actively push for that to happen. However, this may not translate to a better overall picture and may result in conflicting ideas. A good way to mitigate this is to have a Product Owner that consolidates all these “wish lists” and makes the final decision on what features the product should have.
Both methods of development have their pros and cons, but which method you decide to take ultimately depends on how you determine your priorities, risk, and needs.
Speed, Quality, and Cost.
I often tell my clients; in Software Development, out of “Speed, Quality and Cost”, you can only choose 2 out of 3. Here is how Time and Materials and Fixed Bid can affect those 3 factors.
In Time and Materials, you are paying for time. Hence, your vendors may not be incentivised to work faster and face the risk of clients discontinuing the project before completion.
For Fixed Bid, vendors will aim to finish the project as quickly as possible so that they can move on to other projects.
As established above, developers are less bounded by the pressure of time in the Time and Materials model. Therefore, they are at more liberty to think of better solutions and practise better development methods. In Agile, Automated Testing and Test Driven Development are often practised to ensure quality and safeguard against change in requirements.
In the case of Fixed Bid, as the cost is fixed, the quicker the project is completed, the higher the profits. Hence, developers might find the fastest solution to problems, rather than the best solution, affecting the stability and quality of the code.
In the case of Time and Materials, unforeseen complexity during development could lead to an increase in cost or a sacrifice of certain features.
However in the case of Fixed Bid, while the cost will remain the same, vendors tend to already buffer their quotations to cater to these unforeseen complexities. In other words, you may be already paying more than what is necessary.
Hence, should you manage to complete your project in a shorter time frame, the overall cost for Time and Materials would be lower for you, but the vendor profits from the additional buffered cost for Fixed Bid projects.
There are pros and cons to both payment models. However, when paying for your software, take into account the possible changes along the way and different factors before deciding on which payment model works best for you in the long run.
Article by Lucinda Tan, Business Development Director, Tinkerbox Studios
This is the fifth article in the mini series "Tinkerseries: The essentials for introducing technology into your business". To check for the latest updates regarding the series, please visit https://www.tinkerbox.com.sg/blog/2016/tinkerseries-the-essentials-for-introducing-technology-into-your-business.
Or go to the next article here.