August, 2015

Pricing Models. Time & Material

Published: 14.08.2015 | 1691

Learning how to work with the outsourcing companies using different financial terms doesn’t mean you need to get your own experience with the occasional ripped off deadlines, budget overruns and bad mood.

In the perfect world, you just make a single-payment to a trusted team, immediately approve the product, complying with all the requirements, wishes and desires, launch it on the market and enjoy the profit. However, IRL everything is far more complex.

Each model of financial cooperation has its pros and cons for both the customer and contractor. And determination of the appropriate option should be based on the business’s ins and outs, the scope of work and type of project. In the previous article from the Pricing Models cycle, we compared the Fixed Price and Dedicated Team approaches with a promise to consider the Time & Material scheme separately. Voila!

Time & Material Essentials

The concept of the Time & Material (T&M) model means paying for the result, based on labor costs. The customer pays not for the workload at once, but for the man-hours, spent by the contractor's team to develop and implement the software. T&M is best when it’s impossible to determine the full scope of work or terms of their performance. It would seem like

Contractor owns the magic “money” button – he can puff up the project time and budget to infinity and beyond!

But no. The hotshot customer splits the co-operation process into 2-4 week stages. Before the each stage’s start, the customer and the team together define the goals and objectives, and after its end, the contractor provides reports on the results and man-hour working sheets.

Software development

These stages might be completed in different ways: from the backend modifications to a full working prototype / software build, and in exceptional cases to a system’s ready to go version. By the way, the time and the principle stages of T&M are similar to the Scrum iterations, so it often goes in conjunction with the agile development methodologies.

The customer pays for the project based on the hourly rate for each member of the team and level of effort. Therefore, the unwise contractor will fail in attempts of unnecessary project’s cost increase. Payment terms are discussed individually. Depending on the customer, payments will be made on a phased basis, monthly, every six months, and so on.

For planning and controlling the tasks as well as monitoring the time and errors, our company uses the JIRA system. Customer's representatives also get access to it in order to monitor the progress of the project and control costs. Otherwise, the outsourcing team can get access to the customer’s system, if he is accustomed to a different environment (Redmine, Basecamp).

Let's see when the T&M use is highly efficient.

By Client

Pros:

  • Delegation. The client communicates with the project manager and discusses with him. And the manager distributes tasks within the team.
  • Dynamic response. The scope and work plan sensitively changes with the slightest need, by bringing new requirements to the project manager.
  • Financial planning. T&M model might save 10 to 30 percent of the customer’s budget, as the project is divided into short and clear stages.
  • Dream Team. The client has the right to determine the number and the qualification of the team members, deciding that together with the contractor’s project manager.
  • Transparent development and result. The client keeps abreast of the project, with access to the task and labor costs management systems in a 24/7 mode. Due to the stages and arrangements for intermediate supplies, the client receives the intermediate versions with the finished and working functional parts. This exclude any unpleasant surprises like the months-long development without the customer’s feedback.

T&M model

Сons:

  • 24/7 mode. Constant feedback can be both the best solution for the project and its main problem. T&M project requires more attention from the customer, which might not be suitable for everyone. In terms of spending time to communication sessions, it might seem as a disadvantage, but the finished product’s high quality is totally worth it.
  • Vague budget. One way or another, the customer bears the financial risks if he doesn’t know exactly how long it will take to complete the task, and usually that’s how it is. In addition, if the client has decided to get the lesser number of experts, he risks coming up with the additional costs for the development.
  • Contractor’s negligence. We have already said that there is always a risk to get in business with the unfair outsourcing company that will overprice the real labor for profit. Therefore, you need to choose the contractor carefully along with the development stages splitting.

By Contractor

Pros:

  • Full immersion. T&M motivates the contractor to be involved all the time and work hard for the payment period by period. There is no time to relax and let things take their course, and that's good.
  • Post payment. The contractor gets the payment for the real performance rate of the team.
  • Low risks. At T&M, it’s difficult to make a mistake in the project’s evaluation, because the smaller volumes are assessing, the easier it is to determine the budget. It protects the developers’ reputation and the nerves of all project participants.
  • Efficient resource sharing. The contractor is interested in having his team in the service all the time. Therefore, project managers build schedules, so that the team will hit the deadlines and be tone.

Resource sharing

Cons:

  • Customer with an attitude. The team in T&M, as well as in projects with a fixed price, doesn’t communicate directly with the customer, doesn’t discuss the development process task by task. And since people vary widely, no one is safe from that situation when the client gets your bill, gets upset and begins to upset everyone. He might start inspecting each task under the microscope and, in some fatal cases, the man-hour working sheets just make everything worse. Our programmer reported 6 hours on this task. Why 6? Why not 5, not 3? The desire to save every dollar, simple distrust and, perhaps, a limited budget issue force him to argue over every little thing. You can’t prove anything to such of a customer.
  • No guarantees. As we mentioned above, the project managers map out the team load far ahead. And if the work is planned for six months, but the customer's priorities have changed or budget has ended – daaaamn. Tomorrow the team (and thus the company) would be out of work.
  • Fluid requirements. Working with the Fixed price financial model, the customer can’t afford the time to redo all the functionality and interface, and in the T&M case he can do it easily. Some contractors willing to receive the instructions once and work in accordance with them from A to Z. Quick adaption to changing requirements and effective work in this environment isn’t for everyone.

Time and Material projects

What Projects Are Good With T&M?

Of course, the specifics of each project can both simplify life for all parties, and spoil the mood. Therefore, we identify the types of projects for which we recommend the Time & Material model:

1. The project is at the stage of testing, bugfixing, maintenance or updating. T&M is a very convenient option for performing the work in individual blocks. Each step can be described in detailed specs, especially when the primary project documentation is also available and understandable.

2. Mid-length greenfield project. Here we include the products that meet the period up to six months, bring up the 5 people and more teams and require at least an average level of technical documentation. The post payment model allows the contractor to adapt to the customer's wishes and demands of the market, so the clear specs, although necessary, might not be available at first. In this case, the documentation will be written in the course of work, or will be the first task in the project.

3. Large greenfield project. When the project size requires efforts of the cross-functional team of 25 people and more and the development time breaks out from 1 year, the customer also might use the Time & Material. Taking into account such sizes and timing, it is extremely challenging to draw up the preliminary specifications. They might contain thousands of pages and will be adjusted in the course of development.

Think about your project from different angles and consult your contractor about the most advantageous outsourcing scheme for you. We remind you that we have a convenient table of all three methods of financial interaction. Study it and make your project profitable!