For the purchase of goods for a business, the billing process is one of the simplest elements. Having taken the time to select the appropriate equipment and compare quotations, all you have to do is sum up the cost and pay the invoice. Sadly, outsourcing of services is much more complicated, especially in the IT sector.
What is a project in the IT world?
Quite honestly, it could be anything. A standalone project could be a cooking recipe website, a discussion forum or a combination of the two under a single domain. It could be writing an application or porting it to another platform. Setting up a cloud infrastructure or migrating current solutions to AWS. All these things have a common denominator – the purchased product is intangible. For this reason, the choice of an appropriate billing method can be difficult.
Fixed Price or Time and Material?
The above names represent the most popular, completely different ways of billing IT projects. What are their main characteristics?
Fixed Price stands for a predetermined amount. In order to define it, it is necessary to specify the requirements before the works start – any further changes, such as cancelling or adding functionalities, will be difficult. Renegotiation of an agreement, albeit possible, will cause delay and organisational chaos. When you choose this project billing model, be prepared for lengthy consultations, which will allow you to draw up precise arrangements, but will delay the subcontractor from proceeding. It is good practice here to break the work down into phases and set timeframes for them This way, you can pay in instalments based on the progress. While this system may seem convenient from the client’s perspective, as they immediately know how much they will pay and when they will receive the finished product, it is in fact not very cost-effective. This is because the IT services provider has to determine the rate and deadline, while considering possible delay in the works and random influences, which increase the cost. Add to this the poor flexibility, and it becomes apparent that the Fixed Price is a good fit for small, universal, repetitive projects.
Time and Material is a more flexible model. Here, billing for the IT project is based on the number of hours worked. As a result, the works can be started more quickly – you only need to make initial arrangements and many issues are decided on the spot. This type of system is cost-effective for both parties. The client only pays for the actual number of hours worked, while the contractor feels less pressure (resulting in greater productivity). The flexibility of the Time and Material model makes it excellent for long-term operations, so that the end product can be developed without interruption. The opportunity to introduce changes to the project assumptions during implementation allows you to adapt it to the dynamic shifts on the market.
At times, it happens that a project is not completed. The client might change their mind, or they might not be satisfied with the results of the works. It is a good idea to consider securing both parties to the agreement should this situation materialise.
With the Fixed Price model, the only solution is to specify a rejection fee, that is, the amount that covers the cost of the completed works, even if the collaboration is terminated prematurely. It will minimise the contractor’s losses, although it leaves the client without the product – plus, engaging in collaboration with another company on the same billing model will result in huge delays.
By contrast, if you settle for the Time and Material model, both parties are secured. The contractor will be paid for all the works completed, whatever their scope. The client, on the other hand, can introduce changes to the project at any time, which will reduce the risk of an early termination to the agreement. However, if collaboration is terminated at an early stage of the assignment, the incurred costs will be lower than with the Fixed Price model, and it will be a quicker option to start operating with a new subcontractor.
Which IT project billing model should I choose?
I hope that the above article has clarified the differences between the two most popular project billing models in the IT sector. If you have already made your decision and know which solution is better for you, all you need to do now is to get started. As a first step, you can go to the “Contact Us” tab on our website and speak to the StackMine specialists, who will be happy to help you develop a project that meets your expectations.