Fixed-price vs. flexible project: What you should know about your contract options

Business April 24, 2014

Every new software project entails unique considerations, both on the part of the client and the IT consultants. Is the design fully flushed out or is it still shimmering from the spark of creativity that conceived it? Has something like this project been done before, by this vendor or by anyone? Is the road ahead well demarcated or will we be paving the way as we go? The answers to these questions are vital to determining the proper approach to the project — even in regards to the type of contract that governs the product development.

There are a few options to decide between, so it is important to find the right fit for your needs and priorities. At one extreme, there is the fixed-price contract model. This method tends to be popular because it controls costs and helps to mitigate risk in regards to the scope and financial demands of the project. However, this contract model requires a very specific set of circumstances for both parties involved to consider it a success. Because a fixed-price contract requires vendors to bid on projects before they have begun, it is essential that all of the requirements are detailed, well documented, and finalized before vendors are approached so that they have a clear understanding of the work set out before them.

Time and resource allocation from the outset of the project means that there is not any wiggle room for adjustments to the plan during the course of the project’s execution. Given the changing nature of software development, project concepts being realized exactly as planned can be a tricky thing to guarantee. Therefore, before considering a fixed-price contract model, ensure that all project details are both set in stone and well communicated to every involved party so that no last minute surprises erupt into avoidable conflicts.

If, however, the prospect of finalizing every detail of your project before development can begin feels too restrictive, don’t worry — there are alternatives. At the other extreme, there are time-and-materials contracts. These allow for the ultimate flexibility, enabling you to adapt your project design and requirements to meet changing needs throughout the entirety of the project. This flexibility can often be essential because of the challenging nature of considering every possible need before any aspect of development has begun on a project. In fact, it is entirely likely that as a product takes form, new business applications will become apparent and will require accommodation. This is particularly true if your product is innovative and requires exploring previously untested options, especially since it can be difficult to estimate the required time and resources from the outset. A time-and-materials contract also lends itself well to the iterative design models emphasized by agile methodologies and to customer feedback loops, allowing practical experience with the developing product to guide your decision making process. With the freedom to explore all avenues of a project equally, this contract method presents a greater opportunity to maximize product quality than a fixed-price option.

If aspects of each of these contract models seem appealing for your project, you are in luck — there is a happy medium. RTS Labs also engages in contracts that break the project down into clear, manageable phases in order to blend the best features of each of the previously explored options. For the aspects of your project that are known quantities, you are able to work in a fixed-price environment — allowing you to designate clearly the time and resources that are allotted to this section of the project from the outset. However, areas of the project that require an original solution and would greatly benefit from user feedback can be governed with a time-and-material contract. With this hybrid method, your budget and deadline requirements can be solidified for the finalized aspects of the project, while still allowing for innovative options to be explored when necessary. This segmenting of project development into distinct phases allows you to minimize risk while still achieving the highest level of quality.

 


Type of Contract

Benefits:

When to use:
 
Fixed-price
 
  • Controls cost
  • Risk managed by vendor
  • Clearly establishes plan from project outset
 
  • Requirements are detailed, well documented,
    and consider the entire scope of the project
  • Scope, timing, budget, and resources have
    been finalized before project outset
  • Costs and risks are known quantities
  • Internal and external resources are experienced
    with working in a fixed-price environment
 
 
Hybrid
 
  • Combines the best features of Fixed-price and Time-and-Materials contracts
  • Allows for flexibility within the project when necessary
  • Maintains customer’s ability to set costs for known quantities
  • Breaks project into clear, manageable phases
  • Accommodates a wide range of timelines and preparedness
  • Lends itself to iterative design and customer feedback loops
  • Embraces opportunities for growth and development
  • Minimizes risk while still maintaining quality
 
 
  • Portions of the project are finalized
  • Some aspects of the project require an
    unknown amount of resources
  • There is a need to begin project before
    all requirements are finalized
  • The project requires an innovative and
    original solution
  • There is flexibility within the project
    to maximize product quality
 
Time-and-Materials
  • Allows for design decisions to be made during the project
  • Lends itself to iterative design and customer feedback loops
  • Adapts to changing requirements
  • Embraces opportunities for growth and development
  • Needs are likely to change over the course of the project
  • It is difficult to estimate the
    resources or costs required for project completion
  • The project requires an innovative
    and original solution
  • There is flexibility to maximize product quality

Each software development project comes with its own challenges and requirements. Depending on the nature of a given project, a fixed-price contract may be appropriate for meeting your business needs. However, it is important to be aware of alternative contract options so that you can always receive the highest level of quality for your time and resources. If your project requires an innovative solution, your development process may require more flexibility than a fixed-price contract can afford.

RTS Labs has extensive experience engaging in all types of contracts and we are prepared to put our expertise to work for you. If you are unsure of which of the aforementioned models would best fit your current needs, contact RTS Labs today and we can work together to develop the ideal contract for your project.