Hourly billing or Fixed Price – which is more profitable?
Do you want to outsource a mobile app project and have received a proposal for hourly billing? Will you benefit from this solution? In this article, you will learn why this method has become very common with the development of modern technology and whether you can save money on it.
Hourly billing — first, save money!
Consider how you prepare quotes. If settling for a fixed-price option, you’re certainly assuming a margin for contingencies requiring additional work. Practice shows that the client often pays an extra 30% or so of the price, simply a reserve that is often not even triggered but must be paid.
If, as a customer, you choose Time & Material (T&M) billing – then you only pay for the actual work done. There are no reserves or empty payments here – just pure savings.
A bonus of hourly billing over the fixed-price form is that it is easier to control costs from month to month. Your budget isn’t suddenly burdened by one, often sizable, amount that must be paid at once. Instead, you pay smaller invoices regularly – for a defined scope of work – each of which you can analyze in detail, thanks to reports added to the payment order.
Second: speed and control of progress
MVP – minimum viable product
The business environment is very dynamic and rapidly changing. Therefore, there is no room for protracted development and months of waiting for the first shape of the project. This does not mean a completed project must be created in two weeks. Creating a practical application – is its continuous improvement. Indeed, the results obtained in the initial phase will require modification, progress, and development. However, the project team, billed hourly, strives to offer an initial version of the mobile application as soon as possible and get customer feedback from the first market test. The supplier is motivated to focus on efficient and effective use of time – and thus deliver the most value possible.
Billing in this form allows for quicker initial results and gives greater control at each stage of the app project.
Reduced negotiation time
The T&M method significantly reduces the time spent on negotiations. Both sides refrain from lengthy explanations and arguments over price. The client receives the developers’ time and closely correlated work results from the company. This also helps bypass bureaucracy to a minimum.
Based on close cooperation with the client, the supplier moves into action quickly, i.e., within just a few days of the first contact.
Thirdly, Flexibility and Continuous Improvement
Time & Material, instead of Fixed Price, promote greater flexibility, which applies to both transaction sides: the client and the software provider. During the project, the provider can adjust their resources to current needs. They can freely assign the most suitable team to specific project stages, increasing efficiency.
On the other hand, the client gains more opportunities to introduce changes and prioritize them. Moreover, in the case of modifications to the initial plan, there is no need to sign an annex to the agreement. Collaboration, by nature, is based on flexibility and willingness to change during implementation, according to agile management principles.
Time & Material and Agile Methodology
Agile methodologies (e.g., Scrum Kanban, part of Agile management) emphasize flexibility, adaptability, and collaboration. Instead of strictly adhering to a set plan, the service provider can react more quickly to new situations and make necessary changes. Clear communication between the two parties and a deep understanding of the customer’s needs are precious in this context.
The main result of this work is a functional application, and extensive documentation recedes into the background. In this model, clients receive project milestones more quickly than traditional project management methods, allowing them to test individual functions and request necessary modifications more quickly.
Ultimately, the application’s value is higher because it is better tailored to market needs and geared towards customer satisfaction. However, this requires the client’s active engagement in the project’s execution, which, in turn, benefits the project’s outcome. The more closely the application aligns with the industry’s characteristics, the greater the benefits it will bring to the ordering company.
Because Agile methodologies rely on an iterative approach, where companies deliver successive stages in short 2-4-week sprints, the Time & Material billing method seamlessly integrates with this working system. The client gains complete control over project-related expenses and can more easily coordinate progress.
Determination of preliminary costs
You may be concerned that when deciding on a T&M model, you can’t predict how much it will cost to outsource the software. Professional companies anticipate the need to indicate costs, even if, as you continue to expand, they will change.
A good practice is to conduct product workshops, during which the supplier accurately identifies customers’ needs, the nature of the company’s business, and the range of expectations. Based on this, it estimates the project’s value that needs inclusion in the company’s budget.
T&M is a method that is spreading with the development of modern technologies
Time & Material billing is the most characteristic of the IT industry. It has proven to work well because it provides several benefits to both the software developer and the recipient.
First, it allows the customer to receive a high-quality product at the lowest possible price. It does not expose the recipient to additional costs, which often have to be paid in the case of Fixed Price billing. These are costs that the supplier assumes as a reserve – for unforeseen situations. In the version of hourly billing – such a charge does not occur.
The great value of this methodology is the speed of operation. Agile management assumes the handover of work in short sprints, so the client receives the first finished project after just two, sometimes four weeks. It is the T&M billing that favors this form of work. It allows work to start quickly and reduces the time needed to prepare quotes and create possible annexes and other documentation.
T&M settlement guarantees efficient execution, responsiveness, and readiness to make modifications as presented by individual project team members. A rigid plan doesn’t bind the parties to the transaction, which is valid with the Fixed Price version. The implementation of the subsequent phases of the program is very efficient.
In addition, the customer gains control over the execution of the order. Although the ordering party can already define the scope of work in the initial phase, it can easily change it during the project. The project’s value estimation takes place during the product workshop, during which a professional software developer establishes the most critical assumptions.
T&M settlement provides several benefits for both sides of the transaction and is the foundation for building trust between the client and the contractor. In addition, the driving force behind effective performance is, among other things, the creation of a solution that will receive great recommendations, which will ensure the further development of both the supplier and the recipient of the order.
