Fixed Price Vs Time and Material VS Dedicated Team – Which One to Choose

In such a fast-paced environment of IT, the choice of the right project engagement model is now the most important thing. Whether it is Fixed Price, Time and Material, or Dedicated Team model, each one is unique and has its own pros and cons. It is important to be able to differentiate what each of the models provides. This will ensure that your project is strategically aligned with your business plan. In this blog, we will cover these three main models in detail so that you can strike the right balance between performance and budget.

What Is an Engagement Model in the IT Industry?

The engagement model in the IT industry describes the way of interaction and collaboration between the client and service provider who are working on the project. It defines the terms of engagement, the roles and tasks, the payment scheme, and the scope of resource allocation. In other words, this model defines the whole workflow and dynamics of the project which puts both parties on the same page regarding the expectations. Engagement model selection is critical not only for the implementation but also for the project’s success. It measures adaptability and the speed with which the team can respond to challenges and changes occurring during the development process.

Fixed Price Model

The fixed price model, widely used in the IT business, is especially suitable for projects with a clearly specified scope. This execution approach, which is defined by its fixed boundaries and prices, has its own advantages and disadvantages.

What is the Fixed Price Engagement Model?

The fixed price model is an engagement model where both the service provider and the client agree on a specific amount of money for a clearly defined scope of work. At the start of the project, both parties agree on what will be delivered, the overall cost, and the deadline for delivery. These terms are listed in the contract and the agreement is therefore legally binding.

Simply put, the fixed price model is based on predictability. It is probably the most suitable option for projects where the requirements are not going to change, for example, small to medium-sized projects or projects with very specific deliverables that are easy to define from the start.

Advantages of Fixed Price Development Model

• Financial Predictability: The main benefit is budgetary forecasting accuracy. Clients are fully informed about the project cost upfront which is very beneficial, especially for businesses with fixed project budgets as well as startups that need to be very strict with their financial plans.

• Minimal Supervision Required: As the deliverables, deadlines, and costs are predetermined, clients do not need to be involved more and spend much time overseeing the project. The service provider is responsible for the management of the project schedule and quality.

• Low Risk for Clients: The monetary risk will be transferred from the client to the service provider. If a project takes a longer time than anticipated or faces any unforeseen issues, the service provider should manage them and not alter the project cost.

Disadvantages of the Fixed Price Development Model

• Limited Flexibility: This model provides very little flexibility to revise project scope or requirements once the work has already begun. The implementation of any changes can lead to cost revisions and timeline changes, which may cause disagreements or even dissatisfaction.

• Quality Concerns: There is a chance for the quality of work to be sacrificed. Service providers may compromise the quality of work to stay within the budget or to meet the short deadlines set by a fixed-price contract. 

• Scope Inflation: As a risk management strategy, service providers may initially overestimate the cost of the project by accounting for unforeseen challenges. This buffer protection may make the fixed price model more expensive than other models where the costs are directly related to the work performed.

Time and Material Model

The Time and Material (T&M) model is typically used in situations where the project scope and the requirements are not clear at the beginning. This model is based on billing clients for the work done and resources used, and it gives flexibility which is important for many dynamic projects.

What is the Time and Material Engagement Model?

In the Time and Material engagement model, clients are billed as per the actual time spent by the service provider’s team and the material (including resources and technology) used in a project. The billing can be done at agreed intervals (e.g., weekly, biweekly, monthly) between the client and the service provider.

This model is efficient for projects where flexibility and prototyping are important. It enables adapting the plan as the work progresses, which is a very beneficial feature in projects that are innovative or exploratory.

Advantages of Time and Material Development Model

• Flexibility in Scope and Requirements: The T&M model provides unmatched flexibility to change the project scope, pivot directions, or experiment with new ideas. Changes can be incorporated at any stage with no need for detailed reassessment or project delays.

• Only Pay for What You Use: Customers are charged only for the time spent and used resources, which can be cost-saving, especially if the project management is carried out skillfully. This means that there’s a high focus on the utilization of resources and doing only the work that generates value.

• Enhanced Collaboration and Continuous Improvement: This model enables service providers and clients to work together. As the project is developed in stages, it triggers repeated feedback, hence allowing for the continuous improvement of the process. This repeated interaction can result in an improved outcome, as modifications may be made in real time based on the information of actual results as well as client feedback.

Disadvantages of the Time and Material Development Model

• Budget Uncertainty: The main drawback of the T&M model is the possibility of budget uncertainty. Due to the fact the costs are determined by the time and resources utilized, the project’s total cost can be more than the original estimate if not monitored closely.

• Requires Intensive Oversight: Clients have to be ready to take their time managing and reviewing the project progress on a regular basis. This review is essential to keep the project on the right track and within the accepted financial parameters.

• Potential for Inefficiency: There’s an intrinsic inefficiency risk, as the model itself doesn’t come with a built-in incentive to work fast or to limit resource usage. Without proper project management and deterministic performance metrics, there is a chance of projects dragging or resource overexploitation.

Dedicated Team Development Model

The Dedicated Team model is one of the well-known engagement frameworks in the IT industry which is perfect for long-term projects with changing requirements and the need for continuous maintenance or updates. The team is built up to work only on a single client’s project, and they ensure focused attention and an in-depth understanding of the client’s goals and business environment.

What is the Dedicated Team Model?

In the Dedicated Team model, the service provider hires a team of professionals that is dedicated to a single client’s project. This team may include project managers, developers, designers, QA engineers, and other professionals depending on the size of the project. In this model, the client usually has the right to select and manage the team, hence it is more like the client’s extension of their own workforce.

The committed team works hand in hand with the client’s in-house team so much so, sometimes becoming a part of the client’s culture and processes. The model usually gets billed monthly, according to the team’s size and structure, which may be fine-tuned as the project grows or changes.

Advantages of the Dedicated Team Model

• Team Consistency and Commitment: The greatest benefit of this model is the team’s consistency and dedication. As the same team members work on the project throughout its lifespan, they get to know the project’s objectives, the client’s business, and all the specific challenges associated with it very well.

• Greater Flexibility and Control: Clients have a great deal of control over both the project and the team. They can guide the team’s priorities, adapt the workflow, and even make decisions that closely resemble the in-house team.

• Scalability: It’s quite easy to increase or decrease the size of the team depending on the project requirements. This flexibility makes it suitable for those projects with variable demand or those that are in the growing phase.

Disadvantages of the Dedicated Team Model

• Higher Operational Costs: Maintaining a dedicated team may be more expensive than other models, particularly during periods of low activity. The client is held responsible for all costs linked to the team consisting of salaries, benefits, and other compensations without regard to the immediate demand of their services.

• Requires Effective Management: This model requires the client side to have very strong management skills. The client needs to effortlessly guide the team, give clear directions and feedback, and keep the communication line open to achieve success and align the project with its goals.

• Commitment and Long-Term Engagement: The Dedicated Team model usually has a longer-term commitment that may not fit the goals of short-term or one-time projects. This long-term engagement requires continuous efforts and resources.

How to Choose the Right Engagement Model for Your Project?

Project Scope and Clarity

A Fixed Price model would be the right choice for your project with a well-defined scope, clear deliverables, and a low probability of changes. This model bears the risk of budget overruns. On the other hand, if the project is expected to change or require new technologies, the Time and Material or Dedicated Team models can be more suitable, as they provide enough room for adjustments.

Risk Appetite

It is necessary to take into account your risk tolerance when deciding on the engagement model. The Fixed Price model shifts most of the project risk to the provider, making it a more secure option for clients who are afraid of budget overruns. However, in the Time and Material model and Dedicated Team, the risk is shared which means that the project should be actively managed by both parties.

Budget Flexibility

Think about the elasticity of your budget. Fixed Price contracts are strict on budgets, therefore, they are ideal for projects that have a fixed budget limit. Time and Material is a more flexible approach, which may save costs if the project needs fewer operations than anticipated, or vice-versa.

Resource Control

Consider what degree of control you intend to exercise over the implementation. The Dedicated Team model will give you the ability to control the entire process and the team just like your in-house employees. If having direct involvement in the team’s daily activities is a key thing, then this model will work for you.

Long-Term Strategic Alignment

Think of how the project will fit into your overall business objectives. A Dedicated Team may be the more desirable option for continuing projects that are strategic to your business because it will make the work consistent and keep resources allocated to the project. On the contrary, Fixed Price and Time and Material are better for one-time projects or projects with less strategic value.

In Conclusion

Knowing and using the correct engagement model is the key to any IT project. Be it a Fixed Price, Time and Material, or Dedicated Team model, each choice comes with its own plus points and suits different projects and business needs. In order to make an informed decision, you need to conduct a careful analysis of your project scope, budget, and duration. By choosing the model that is most in line with your strategic goals, you will not only experience a smoother implementation, but you will also achieve more successful results.

Frequently Asked Questions