Business

Choosing Between Time & Material and Cost+ Pricing Models in IT Projects

NY Weekly Staff

March 19, 2024
2:01 pm

By utilizing outsourcing services, companies have the potential to slash their expenses by an average of 40%, provided they select the appropriate pricing model. Analysts predict a 5% uptick in the IT outsourcing sector in the coming years, projecting a market value surge to $425.19 billion by 2026.

You can compare two prevalent models to assess their respective advantages and disadvantages, strategies to mitigate shortcomings, and which aligns with your business objectives.

What Exactly Is A Time & Material Pricing Model?

In this type of contract, you won’t have a clear picture of the project’s total cost until it’s completed. The software development company you hire will offer hourly or monthly rates for each specialist they assign. You have the flexibility to adjust the project’s requirements and scope as it progresses. The final cost is determined based on the number of team members working on your project and the hours they dedicate to it.

This model, known as Time & Material (T&M), is typically paired with Agile methodology.

We suggest considering the T&M pricing model for software development if:

You’re a startup with IT knowledge.
You’re a medium or large business with experienced decision-makers who are comfortable managing remote teams and understand how to collaborate with dedicated teams.

Here are the benefits of a T&M pricing model:

Quick project initiation: You can kickstart the project without extensive specifications. Just assign the first task to the development team and plan the next steps as you go. This approach helps prevent downtime.
Fixed rates: You establish the rates upfront, and they stay consistent throughout the collaboration. You won’t need to worry about paying for sick leaves or holidays; the contractor handles those matters.

Here are the drawbacks of a T&M pricing model:

Potential for higher costs: The final expenses might exceed your initial estimates and budget.

How do we mitigate this risk? Consider requesting a skilled Project Manager and Business Analyst from the contractor. They can collaborate with your representative to create comprehensive project requirements—the more detailed the project description, the lower the chances of encountering incorrect tasks.

The T&M model offers a results-driven strategy. You can trust the manager provided by the contractor and may not need to closely monitor the development team’s activities. However, this can lead to less experienced ones replacing experienced specialists due to turnover, and you might not be aware of it.

How to prevent this scenario? Personally interview and approve each key professional. Then, communicate with your contractor and ensure they take responsibility for retaining the core talents throughout the project.

What Is the Mechanism Behind Cost-Plus Pricing?

Picture this: you’re tackling a long-term project spanning over a year. Whether or not you have an in-house software development team, you require additional resources and need them promptly. So, you contact an outsourcing software development company to recruit dedicated tech specialists. These specialists become part- or full-time members of your team, drawing fixed salaries and operating under your direct supervision, even though officially, they remain employed by the outsourcing vendor. This collaboration model aligns perfectly with the Cost-plus pricing approach.

When opting for the Cost-plus pricing model, your monthly payment covers several components: a fixed salary for each specialist based on market rates in the vendor’s country, as well as overhead expenses like insurance, rent, utilities, and other miscellaneous costs.

This method fits nicely with Agile, Kanban, Waterfall, or any other methodologies, adjusting to suit the unique requirements of your project.

We suggest considering a Cost plus model in outsourcing for:

Startups whose decision-makers are familiar with outsourcing collaborations.
Medium and large businesses, especially product companies, already maintain an in-house team. They may require additional resources when their employees are overwhelmed or lack specific expertise.

Here are the benefits of a Cost-plus model:

Cost savings: By selecting a vendor, such as one located in Eastern Europe, you can reduce fees significantly without compromising on development quality. Compared to markets like the US, UK, or Israel, you could save up to 40%.
Efficient teamwork: Your development team begins collaborating as a cohesive unit from day one, leading to high performance. These experts usually have worked in focused teams and are skilled at handling obstacles and deploying successful tactics.

Here are the drawbacks of a Cost-plus pricing strategy:

Potential internal team friction: If you already have an in-house team, bringing in outsourcing specialists can lead to communication challenges and difficulties in managing the dedicated team. Existing employees may feel threatened by the new competition and uncertain about their future within the company due to a lack of experience with such setups.

How do we address this issue? Bring everyone together for a meeting to talk about the reasons behind team expansion. Emphasize the benefits such as knowledge sharing and increased productivity. Request that your contractor assign a professional Project Manager to integrate the dedicated team with your in-house team and address any concerns. Use tools like Jira, Slack, or Microsoft Teams to make communication and management easier. This ensures teams can interact smoothly and transparently.

You’ll need to manage sick leaves, holidays, and overall workload for your outsourcing team just like you would for your in-house staff. Keeping the work flowing steadily is important to avoid losing money due to idle time.

How do we tackle this challenge? Request access to your vendor’s employees’ contracts and financial documents for transparent fee understanding. Before starting work, discuss with your contractor how to swiftly scale your team up or down to maintain a balanced workload and avoid interruptions in the development process.