Up until now, I’ve been trying to avoid comparing the Fixed-Price and the Time and Material models, but when one considers the balance of profit and loss it seems justifiable to confront the two.
It is worth considering whether the risks for the customer aren’t greater in the case of the fixed-price model. It may sound odd at first, but we should take these three thoughts into account:
- In the fixed-price model, it seems that the contractor takes all the risk. In fact, the security margin is accounted for in an appropriate surcharge in the general estimation. It is therefore difficult to get a reliable ROI estimate at the contract signing stage. It’s almost certain that the question “wasn’t it possible to achieve the same at a lower cost?” will be asked.
- Only precise specifications will guarantee the success of the project. However, it is difficult to avoid prolonged discussions on what the customer actually agreed to, even with the best description of the solution.
- Only the contractor would benefit from the emergence of any new technology that might significantly shorten work on the project.
So what’s the deal with ROI in case of the Time and Material?
Just as the work is divided into sprints, ROI is created in stages and is comprised of various features whose execution is scheduled for the nearest iteration. Before each sprint, the customer can check the following:
- what exactly can new features bring,
- how much do they cost,
- what will be the return on the undertaken investment, and whether it’s not, perhaps, the right moment to finish the project.
It may happen that business needs are met earlier than planned, so creating hundreds of unnecessary features can be avoided. Furthermore, before the next iteration the customer may also decide (i.e. by comparing ROI) that it’s more worthwhile to invest in new or improved technology and follow a different path.
author: Tomasz Liberski