When discussing a new <a rel="noreferrer noopener" href="https://chop-chop.org/services" target="_blank">web development project</a> with a vendor, one of the most important factors you'll need to consider is whether you will be charged for the work on a fixed-price or time-and-material basis. The type of contract you agree to may have huge consequences for the success of the project. Having worked as a PM on projects with both fixed-price and time-and-material contracts, I wanted to share my perspective. Hopefully it will give you some fresh insights on the matter.

If you are in the business, you probably already have a very good idea about what fixed-price and time-and-material contracts are. Still, let’s start with a brief summary of what those types entail, and when they work best.

The name fixed-price (FP or fixed-scope) contracts is pretty self-explanatory, both with regards to what this type of contract entails for the client and vendor, and what the best application of the contract is. Fixed-price contract means that the entire scope of work needs to be agreed in detail before work commences. The client will be billed a fixed, predetermined price for the job. It’s best to apply this type of contract to projects that are either short-term, or have a very defined specifications, not changeable while the project is underway.

In the time-and-material (T&M) type of contract the client agrees to pay a daily or hourly rate for the work carried out by the vendor. The final cost of work depends on the amount of time and materials that were required to complete the assignment. It's best to apply T&M contracts to projects that don't have fully defined requirements, or where the scope of work might change in the course of the project.

Looking from the client’s perspective, you might be thinking - “wait, if that’s so, why would I ever agree to a time-and-material contract? Doesn’t that increase the risk on my side?” In the end, working on a fixed-price basis should make the budget of the project much more predictable, shouldn’t it? Well, yes and no.

In a nutshell - the type of contract the client and vendor agree to should always match the type of project they are undertaking.

1. Small landing page for an ongoing service

If the client needs assistance with a very small project, like building a single landing page, it might make more sense to enter a fixed-price contract. If the requirements are well defined and designs delivered to a high standard, there should be no surprises. The scope of work is unlikely to change. On a FP contract, the vendor will be motivated to deliver the project as soon as possible - this will increase the margin on their side. The client will be satisfied having the work delivered to them sooner, so it's a win-win.

In the case of a full company website we expect the work to take more than a couple of days. Even if the scope seems to be set before the work commences, the requirements will likely change in some areas. For example, it might turn out that two plugins selected for the site are conflicting with each other. Or that a certain part of the project needs to be redesigned to be more user-friendly.

These changes may seem small, but keeping track of all these little modifications to the scope will prove harder and harder during the course of the project. And renegotiating the price each time to account for them takes precious hours. What’s worse, renegotiating the price means that budget predictability - which is the whole reason you signed a fixed-price contract in the first place - is deteriorating.

In cases such as this, it will usually make more sense to enter a time-and-material contract from the start. Yes, you will be charged for the project as you go, but will retain much more flexibility.

One of the concerns for new startups is often a limited budget. Therefore, when trying to develop a new app, some startup founders will feel tempted to enter an FP contract with their vendor, to ensure a stable budget. This may turn out to be a mistake.

As I explained with the example of a company website, even projects of medium size and complexity will most likely go through a few scope changes before completion. Imagine what that means for a large and challenging project by a company that is just emerging and trying to find its place on the market. The requirements may shift dramatically during the development phase. With an FP contract, you may end up having to renegotiate the budget over and over again, with little work actually happening on your project in the meantime.

On a T&M contract, you will retain the flexibility you need in order to complete the project in line with the changing requirements. Your vendor will be motivated all the way through to deliver a great product.

Alright, enough with the examples - I think you are definitely seeing a pattern here. The general rule is simple - the more flexibility the project requires from you and the vendor, the more sense it makes for both sides to enter a time-and-material contract. Flexibility is probably the biggest advantage of time-and-material over fixed-price.

Here at Chop-Chop, though, we like to think that there is more to it than that.

As I wrote, it’s best if the type of arrangement you enter matches not only the project, but also how you operate as a company. And the same goes for your vendor. There are a couple of reasons why we prefer to work on a T&M basis, and why we believe that it is beneficial for our clients even with short-term projects.

One of the reasons why we prefer time-and-material contracts is because we believe in charging our clients fairly. With fixed-price contract there is an incentive on the vendor’s side to conclude the work as fast as possible. This way they will increase the margin on their side.

To us, this sounds a bit like a motivation to cut corners. In the end, the vendor could further increase their profit by assigning an inexperienced developer to the work. Or deliver a half-baked product. This is not what development is about.

When working on a time-and-material basis, the vendor should always clearly report on the amount of time spent on specific tasks. If they don’t - this could be reason for concern. Clients should be able to access time reports to have a clear idea of the progress, and be able to decide on the priorities. You need to know what’s going on in the project to be able to make decisions about the budget and scope.

No matter what type of project we are working on, we believe that focusing on quality is always better than focusing on renegotiating the budget. Time-and-material contracts allow us to do just that. Clients can change the vision of the product at any moment, and we spend as much time on the project as necessary to deliver on the requirements.

The number one thing that clients usually consider when discussing the type of contract with the vendors is budget stability. However, there is more to product management than controlling the budget. Try to ask yourself: is the scope of work well defined? How much flexibility will the project require from me and the vendor? Will this be a short- or long-term arrangement?

That there is more to product management than controlling the budget. Try to ask yourself: is the scope of work well defined? How much flexibility will the project require from me and the vendor? Will this be a short- or long-term arrangement?

These questions will help you choose the type of contract that will best suit the needs of your project. And remember, you can always consult your <a href="https://chop-chop.org/team-extension/">web development partner</a> who will advise on the best solution.