How Time and Materials Contracts Work — Gain Control over Budget and Quality
When choosing a vendor for development work, you have to decide on the type of contract: fixed-price or time and materials (T&M). Whereas the mechanics of fixed-price contracts are rather obvious — you pay for the whole project upfront — the T&M model begs a more detailed explanation.
Time and materials contracts are usually woven tightly with the agile approach to software development.
As such, the project follows agile rules of development. After each two-week sprint, a part of the application can be tested and analyzed for feedback. This feedback shapes further development, which means the product’s shape can be adapted based on the learning you get after every demo release.
The core of the T&M model is therefore agility and flexibility.
You’re not locked in the scope of a fixed-price project, where it’s difficult to introduce any changes after kickoff.
In T&M, you can swiftly adjust the scope based on your growing knowledge of the product. The decision-making process is also not sealed at the start of the development, as is the case with fixed-price contracts.
Possible scenarios where scope flexibility is handy in product development:
UI tests (e.g., UX Cam) revealed there are too many elements in the interface, but user feedback indicates the need for another feature. This feature can improve ROI because it influences the purchase decision among early adopters.
Something happens in the middle of the project, e.g., a global shift to remote work, and you need to pivot and change the direction a notch. It can be done with relative efficiency in T&M contracts.
Now let’s deconstruct how a T&M contract gives you control over budget and quality.
A good T&M partner won’t let you waste money without first validating initial results through an MVP
When you know the team’s composition and hourly allocation for a month, planning for the development spending in the budget is easier.
Besides, in the T&M approach, you’re being charged only for hours devoted solely to your project. Internal duties like company workshops and meetings shouldn’t be included. That said, you should have access to timesheets and be able to regularly verify the invoice status.
Once the development begins but the design isn’t yet finished, changes in the design can influence the cost. This can go both ways, either increase or decrease the final cost.
For example, the greater the number and complexity of screens in a mobile app, the longer it takes to code them. So, whenever possible, the team you’re working with should suggest ready-made libraries that take less time to implement.
Good designers consult the design with developers during development. This lets them find solutions that cut development time but retain user experience.
No buffer for the software agency
In fixed-price contracts, software agencies usually add a buffer to set off any losses caused by a variety of internal and external factors.
In T&M contracts, a software agency doesn’t have to add a buffer to the final cost to ensure all unexpected expenses are covered. By principle, you only pay for the actual effort the team does on your project.
How a T&M Contract Makes It Easier to Keep Tabs on Quality
Transparency in development and progress-tracking
To check how your product fares, you can ask the vendor about a CI/CD (continuous integration and continuous discovery) release cycle. In the CI/CD, you see how the changes in your app look every day via a working demo.
CI/CD lets you quickly gauge the quality of the app. You get to resolve any issues and spot the inefficiencies in your software development partner. As a result, problems are thoroughly researched and solved using a long-term solution. In fixed-price projects, a software agency can be tempted to use a short-term solution just to meet the deadline and earn the buffer.
Easy progress tracking in project management platforms (e.g., JIRA, Trello) lets you see where your app is and how that relates to the scope and budget spent.
A time and materials model encourages day-to-day communication and status updates with any successes or issues.
With frequent communication and sprint planning, a software agency can work out more efficient solutions. Seamless communication also stimulates the search for innovative approaches — when the exchange of information is fast, new solutions can be employed swiftly.
In T&M contracts, you can include a termination policy. This is especially helpful when the deliverables don’t meet your standards or the market suggests your business strategy or product may not be relevant anymore (unless it pivots, for example).
In the T&M model, the work for a software agency isn’t guaranteed for a specific time frame. This makes the vendor put special emphasis on the quality of the product — when unsatisfied with the results, you can simply go to another vendor.
Easy changes to scope and requirements
Whenever trends or consumer preferences change, the T&M model gives you immense flexibility. For example, if there’s a business need to implement additional features to ensure the product is relevant to target audiences, the scope can be updated quickly.
Also, a software agency can provide suggestions that lead to faster development (e.g. minimizing animations or avoiding custom buttons in favor of ready-made components). Some of those components may not be available at the start of the project but can appear during later stages. So, when the project is estimated for a fixed-price contract, the software agency works with what’s at hand at the time. In T&M contracts, better solutions are implemented whenever they’re released.
Note: As a rule of thumb, a software agency should advocate for a minimum scope in your product. With a swift MVP release, you gather data that encourages data-driven development in feature conception and implementation. Data backs each feature with numbers. Plus, these numbers are a direct response to what users need and expect.
T&M doesn’t mean the time development should be long — quite the contrary. That said, be wary of a software agency that doesn’t encourage you to split the project into an MVP-based start and ongoing development with user feedback. A good T&M partner won’t let you waste money without validating the results through an MVP first. The key in T&M is to release the product and see if it has a chance to succeed.
Time and Materials Contracts Contribute to Better Business Partnerships
Long-term relationships are the key focus of operations for any reliable software agency. There are two reasons behind it. First, long-term and satisfied clients are more likely to return with new initiatives. Second, they’re also more likely to recommend a software agency to other companies.
The time and materials model of cooperation builds stronger business partnerships where there’s greater flexibility for both parties. For example, when you’re running a relatively low budget, a software agency can prepare an MVP that lets you market your product or acquire investors for further development.
With this approach to pricing software development — combined with agile and lean development — you get the highest degree of transparency into deliverables. You control the progress of the development and the budget.
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+10 years' experience in business relations (+5 centered around digital products including SaaS and custom app development for start-ups and corporates). Managed to build sales and growth strategies for a brand new SaaS start-up (meeting application). Competed successfully with a giant like Eventbrite and engaged multiple Fortune100/Fortune500 companies into collaboration.