If you run an agency or work as a freelancer you surely know that outsourcing-like agreements can be built upon either the fixed price or the time-and-material model. Selecting one of them can be tricky as well as switching from one to another. Read on to learn everything you need to know on this topic.
Around 2005, the offer of “setting up a website” started to appear more and more frequently in recruitment services. These were times when agencies were creating something that required a significant technological leap as yesterday’s methods to advertise oneself started to fail. Leaflets and business cards, once useful, went out of date as agencies were forced to face an interactive world full of lines of code and pixels. To do square up to this new challenge, they had started to look for specialists among young people who were eager to program or use graphics programs, which they treated as their hobbies.
Selecting the right pricing contract
Models of cooperation between agencies/freelancers and customers in the first decade of the 21st century are mainly based on the so-called fixed price models. They assumed a fixed price for the project within a specific advertising budget and agreed scope of work.
Today, the dominant model of cooperation seems to be the model based on the time & material principle, i.e., agreements concluded between agencies, customers and even employees of agencies, freelancers, where working time is a variable. In this case, the entire scope and budget of the project are not fixed rigidly and what is paid for are on-the-fly tasks, calculated on the basis of the number of hours worked.
It’s because:
- The project is complex, and the scope of the work is difficult to predict,
- The project is doomed to the necessary changes during its lifetime,
- The Customer wants to interfere in the project during its duration.
From the agency’s point of view, therefore, you have two different accounting models to choose from. It is worth to pick the one that best suits the specificity of your project.
It is better to go for a fixed price model if:
- You have a well-defined scope and schedule of work,
- You have a proven customer with whom the cooperation has been fruitful so far,
- The customer is not competent enough to verify your work on an ongoing basis.
Time & material is a good choice if:
- It is difficult to define the scope, schedule, and shape of a project at an early stage of its realization,
- There is a person in the customer’s team who can analyze your work,
- You want to have control over the price of the project.
Switching from fixed price to time & material
The transition from different billing models to the time & material one does not have to be painful. On the contrary. Most of the companies that have done this commend the transformation. Here are the areas you need to pay attention to when implementing each project:
Bilateral work organization means building a project team on both sides - the customer and the contractor. Such distribution of power means that the customer has continuous and complete control over the shape of the project. We involve the customer in planning the scope of work. At the same time, we should schedule cyclical sprints, which will allow us to discuss our tasks and future work.
Involvement of the team in other projects is excluded from the time & material model. The fixed price model usually provides a temporary safety buffer, which allows the team to be pulled out for other jobs. Due to its dynamic nature, time & material implies the maximum involvement of the team in a specific project, and your agency must be ready for this.
Valuations — Proper analysis must precede time & material projects. They should be cheaper because we do not add extra time for the project implementation as in the case of the second model. It makes the model more time-sensitive.
Controlling the time and material budget of the project
The control of work stages in an agency, or IT company is, in fact, control of the main costs of a project. When deducting the fixed expenses that we can plan before starting the project, we have to adopt flexible variable, which is: working time!
Many tools on the market can help you count your working time, eg. TimeCamp that integrates with Nozbe. With the right application you can register the time spent on the execution of the tasks and check at what stage of your project you are and to what extent you used up the budget allocated to it.
