Our customers love to work for T&M. We tell you why it is sometimes better to choose Fixed Price

Our customers love to work for T&M. We tell you why it is sometimes better to choose Fixed Price

Greeting! I am Vitaly Doshchenko, New Business director at AGIMA. Let’s talk about models of work with the customer. Here are the statistics for our contracts: 52% – Time and Materials, the rest – Fixed Price. Although the preference is towards T&M, I will explain with a simple example why it is sometimes better to choose Fixed Price for launching new projects.

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Just in case, let’s remember what pricing models exist. Here we do not consider the option when firms work without a contract. This is almost always dangerous for the customer and the contractor. It is better not to do this, use one of the three models:

Fixed Price

T&M

Retainer

What is important to know

We are paid for the result. It can be a website, design, mobile application, etc. We do all this on the basis of a detailed technical task.

We are paid for team hours. And the team is already making the site, design, mobile application, etc. We determine the cost based on monthly reports. It can change.

Another way is to buy out the team. The customer pays a fixed amount in advance per team hour every month.

Legal aspects

This is a contract. The most important thing in the contract is the final result, term and cost.

This is a service contract. In the contract, we assume the intention to spend time efficiently in order to move towards the result together with the customer.

The retainer is a subspecies of T&M, so I will not dwell on it in detail. I compare only Fixed Price and T&M.

Most often, the customer chooses T&M for two reasons:

  1. You can change the requirements. At the very beginning of the project, the customer does not understand what the result should be. Therefore, he trusts the experienced team of the contractor, because everything can be changed at any moment.

  2. T&M is cheaper. The rate at T&M is about 15% lower on average.

But if you figure it out, these advantages can turn into disadvantages. I will try to prove it below.

Fixed Price vs T&M

Let’s conduct an imaginary experiment. We will push the Fixed Price and T&M models through all stages of the project — from presale to release. We compare them through the eyes of the customer.

Introduction about the project: typical average project; there is a short TOR for the development of a web service, a mobile application and a personal account. It is still necessary to fasten the service bus for communication with the customer’s information system.

1. Stage of presale and sale

Key agreements and expectations of the customer from the future product are built here.

How does the customer think at this stage

Fixed Price

T&M

The project is not complicated – we have already done this many times. We held many meetings with the team: we broke down the system into parts, roles, functions, removed the excess and formalized all this in documents. The original plan was cut in half, so we plan to finish quickly – in three months.

Pretty much the same, but here we don’t need to prepare a bunch of documentation. And the rate is lower and the requirements can be changed. Let’s connect a large research team and make it in the same three months, but without the constraints of the brief.

What the estimates look like:

This is a Fixed Price estimate. On the left are the functions and sub-functions of the system, on the right in the columns are the roles involved in the creation of each function.

This is a concise estimate of T&M. It has five stages of work by month.

Fixed Price

T&M

The decomposition is very detailed, but this also makes the cost more transparent: the more lines in the decomposition, the more expensive the project, but at the same time there are more scope reduction tools. Already at this stage, you can see the first version of the risk-free project.

There are 5 stages by month. As part of the stage, the team gradually grows and becomes more expensive, new roles are added. Somewhere in 5 months we will come to launch. We see exemplary cost and labor costs. And so far everything fits perfectly into the brief.

What does the budget look like?

Revaluation – 4,000 hours.
With understanding of the project is at least 2 times higherbecause we collected and decomposed the requirements.

The overestimation is 3,000 hours, but we did not take any risks.

2. Pre-project inspection

At the PPO stage, system boundaries are fixed and a prioritized final backlog is formed. This stage is important, so there is still little room for error. The further it is, the more expensive it is. You can learn more about this from a study by the University of Bristol.

How the customer sees the PPO

Fixed Price

T&M

Communication with the team increased: we agreed on the Vision and the backlog, removed contradictions. Along the way, new requirements were discovered: integrations, features and business requirements from stakeholders. This made the system more complicated, so the scope would have to be reduced to fit in time.

Our priority is the result, not bulky documentation. Let’s forget about the ideal design concept for now – we will agree and correct it later. Did the stakeholder bring new ideas? Let’s get to work. It’s time to test hypotheses and write code, because there are only two months left.

What does the budget look like?

New requirements appeared and the budget increased. Project understanding is still significantly higher than T&M because we have already marked and fixed the boundaries of our system.

It is still difficult to determine the final cost. Perhaps it will be twice as high.

3. Planning and design

We develop Customer Journey Map, create prototypes and design mockups. For a Fixed Price project, the prototype is usually detailed. The better we work out the requirements in the first phase, the fewer risks at the end. Even UX editors work here.

How the customer sees it

Fixed Price

T&M

We make comments carefully, because everyone needs to be agreed with the team. Plus, you can’t change the agreements of the previous stages, otherwise the price will increase.

We can taste different design options. We focus on trendsetters, we will choose the best. At the time of release, we will have time to make a complete redesign. We do not reduce the volume, because the first version must include all the ideas of stakeholders.

What does the budget look like?

We have the most important artifact – the agreed technical task. Now we can fix the estimate and say for sure that the project will be ready in 5000 hours instead of 4000. We already understand exactly where we are going.

More watches were made by connecting two programmers who write code “on stubs” – without TK, they perform standard functions, which are then screwed on. Or maybe they won’t fix it, because the system requirements are constantly changing.

4. Development

How the customer sees it

Fixed Price

T&M

There are a lot of documents, and the application is everywhere. Instead, development with TK has already begun.

The reports already show a gap in hours and cost with the original estimate. The launch is only a month away, and nothing is ready to go.

What does the budget look like?

Made 2550 hours, 3000 left.

They produced 1,000 more hours than they estimated, because the team grew by 4 people. The budget is exhausted, and we still do not have a 100% understanding of the product and cannot accurately estimate the final budget.

A T&M project crisis usually occurs at this stage. The customer is surprised, because it seemed to him that everything was going smoothly. The project can be continued under T&M, but with serious over budget. The best option here is to switch to Fixed Price.

5. Turning point: transition from T&M to Fixed Price

What does the budget look like?

Fixed Price

T&M Fixed Price

Made 2550 hours, 3000 left.

There are more people in the team. We have already identified enough requirements and understood the task, but we did not have time to do much. Another 4,200 hours are needed to finish the project.

6. Launch

What the project budget looks like at the end

Fixed Price

T&M Fixed Price

The overestimation was 4000 hours.

The entire project took 5,500 hours.

The team has not changed.

Overestimation – 3000 hours.

The entire project took 7,600 hours.

The team increased by a third.

Now let’s convert the watch into money:

Let’s take the average rates: 2,600 rubles per hour for T&M and 3,000 rubles per hour for Fixed Price. We will see that T&M is 30% more expensive.

The cost of Fixed Price increases gradually, but then is fixed at one level. Project with T&M at the start it is much cheaper, then the cost increases sharply and reaches a plateau only in the last months of development.

In our example the T&M project turned out to be about 5 million more expensive than the Fixed Price project. At the same time, the project is from T&M — more thoughtful and beautiful, it better meets business requirements and is more liked by stakeholders. Here it is necessary to decide whether all this is worth such additional investments, namely 5 million rubles. I think not.

Instead of imprisonment. How can you spend the difference of 5 million

I would spend them on the gradual launch of the product – Soft Launch. This is when we test a new version of a product first on a limited audience. Then we correct the errors and only then release the product for a larger audience.

For example, we made the first version of the project, started it with our most loyal users and got all their users to complain. Then conduct qualitative research, surveys or in-depth interviews to understand what users liked and what they didn’t.

Next, we expand the audience. You can send out the old base of registered users or release a new version of the product with the option of rolling back to the old one. The main thing is that at each of these stages we collect feedback from real users and improve our product.

As a result, for the same budget, we get a product that meets not only business requirements, but also user needs and market trends.

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