8/23/2020 Comparing 3 Popular Pricing Models: Fixed-Price, Time & Materials, and Milestone | by SteelKiwi Inc.

SteelKiwi Inc. | The Startup | Medium

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Comparing 3 Popular Pricing Models: Fixed-

Price, Time & Materials, and Milestone
SteelKiwi Inc. Follow
Jun 19, 2018 · 7 min read

. . .

When a customer hires a software development company, they sign a billing contract.
The pricing model used depends on the project. The main models are fixed-price, time &
materials, and milestone. In this article, we look at the advantages and disadvantages of
these pricing models and tell you which is best to use when.

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What is the fixed-price model?

A fixed-price contract is based on an estimate of the amount of work that needs to be
done. Project requirements need to be written to define this scope of work. Wireframes
also need to be created to help the development team figure out the hours necessary to
implement all features. With a fixed-price project, the service provider and the customer
both carry some scope-related risk. Any extra work (when clients want to add a totally
new feature that was not specified in the documentation) usually goes under an
additional agreement. In this case, the client must pay extra.

In this model, it’s important to discuss everything before the actual development in
order to estimate the cost of the software product. The fixed-price model ensures that a
project is done and delivered within a specific timeframe and budget.

Advantages
Finalized pricing. After the contract is signed, the client knows the budget. The
company cannot overcharge without notice.

Strict deadlines. When the customer understands what features they want in an app,
the developers can come up with a clear plan and definite deadlines. Everybody
knows what work will be done at any given point in time.

Predictability. When everything has been discussed and planned beforehand, it’s
easy to monitor the status of software development and predict if the work will be
completed on time.

Little to no management. All project details are defined in the contract, so project
management can be passed down to the project manager. No excessive supervision
is required on the part of the client.

Disadvantages

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Implementation of this new feature has to be negotiated independently. With fixed-
price projects, the paperwork and approval of new features takes much longer and
can potentially stall the whole development process.

Long planning. A fixed-price contract demands in-depth planning. Developers need

to discuss every detail and every action along with possible pitfalls.

Miscommunication risks. There’s always a risk that miscommunication may lead to

delivering a product that doesn’t exactly correspond with what the client hoped for.
Such misunderstandings can happen because the project specifications aren’t clear.
Lack of project monitoring can also cause miscommunication, especially when
developers need confirmation or feedback on the work that must be done. If the
client is working with an offshore company, they need to know how to manage a
remote team to avoid project stagnation.

When to use
The fixed-price model works best for small projects with limited features and clear
requirements. It’s also good for MVPs and projects with limited budgets and definite
deadlines.

What is the time & materials pricing model?

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and carries all risks related to the scope of work. The level of responsibility that the
client carries for the whole development Continue
process with time & materials is much higher
than with fixed-price or milestone projects. The customer gets set up with a team and is
billed for the actual time spent on development.

Advantages
Flexible requirements. Work is divided into short sprints and results in an MVP
(Minimum Viable Product). To meet the customer’s expectations, features can be
added or removed.

Hourly rates. Customers pay a stated hourly rate a given company has.

Product quality. The product is well-tested and brought to near-perfection thanks to

multiple iterations, resulting in high-quality software.

Transparency. The time & materials model allows clients to monitor progress as
developers present reports on work accomplished.

Disadvantages
Uncertain deadlines. Any adjustments to the project can postpone the final release
and the project can become overdue.

Undefined budget. The price is approximate, so the client doesn’t know for sure how
much money they’ll spend since the timeframe for designing and implementing
features is flexible.

Need to manage the process. The product owner needs to manage every iteration as
well as every step of development in the time & materials model.

Hard decisions. Since market conditions can change unpredictably, it may become
clear that some features or design elements that were originally planned are no
longer relevant. In this case, the product owner must act immediately to adjust
development to better meet market conditions.

When to use
The time & materials pricing model appeals to customers who want flexible procedures
and agile project execution. This model works for projects with changing requirements
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when there’s no set scope of work and when a lot of
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willing to get really involved in the project since
their approval and vision is an important part of development.

What is the milestone pricing model?

With Milestone pricing, the customer is billed when a service provider has implemented
a specific scope of work over a certain period of time, achieving a predefined milestone.
At that point, the client needs to pay the service provider an amount that depends on the
time spent and the things achieved for the given milestone.

Advantages
Paying on achievement. The customer pays for actual functionality delivered to
them.

Control the results. The client becomes the person who approves each milestone.

Criteria. Most IT companies will provide clients with a checklist they need to use
when they receive a piece of work for approval. This checklist is supposed to guide
them to see if everything works as expected.

Disadvantages

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amount approved for each milestone.
Continue
Long disputes. If a client finds something they don’t like or something that doesn’t
correspond to the functionality listed in the checklist, the development team will
have the right to dispute. This back-and-forth can take a considerable amount of
time as the two parties come to terms.

No rigid timeframe. Since planning and project execution is iterative, there’s no

specific timeframe for when the project will be completed.

Lack of trust. Some IT companies don’t trust this model and refuse to work with
clients who insist on it.

When to use
The milestone model is best when the service provider and client have a good
relationship to eliminate the chance of fraud. If the two parties trust each other, it’s less
likely that a dispute will arise. The milestone model works best for business partners
with established relationships so there’s minimal downtime during acceptance and
disputes.

Related: From a Client’s Request to Signing the Contract: How SteelKiwi Does It

Choosing the right contract model

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model should be used. Clients should avoid including lots of functionality in this case
and instead focus only on core features. IfContinue
the project is quite flexible and requirements
change frequently, then the time & materials model should be applied. When the parties
have a long-term and trusting relationship, they can work according to the milestone
model. In a nutshell, customers must balance their expectations of quality, deadlines,
and price.

Ukrainian tech talent is popular on the market. SteelKiwi is a Ukraine-based software

development company that’s been on the market since 2011. Our technology stack
includes Python/Django, AngularJS, React.js, HTML5, CSS3, Flutter, Swift, Objective-C,
Java, and Kotlin. These technologies allow us to implement projects in on-demand
services, e-learning, business process automation, entertainment, and more. You can
read our portfolio to get a better idea of the clients we’ve worked with and the goals
we’ve achieved while overcoming difficult technical challenges.

If you have any questions related to pricing models or would like to build a project of
your own, get in touch and one of our sales representatives will guide you through the
whole process.

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8/23/2020 Comparing 3 Popular Pricing Models: Fixed-Price, Time & Materials, and Milestone | by SteelKiwi Inc. | The Startup | Medium

We’ve made changes to our Terms of Service and Privacy Policy. They take e ect on September 1, 2020, and we
encourage you to review them. By continuing to use our services, you agree to the new Terms of Service and
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