Fixed-price vs time-and-materials: how to choose the right IT outsourcing contract

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By now, you probably know how crucial scaling IT operations is to scaling your business. Technology is the cornerstone for building your product and company–but it can also become the rock you trip over unless you take serious action to ensure your IT is up to par with your business needs.    

While aiming for an internal software development team in the long-term is the goal, building one takes resources your business may be lacking right now. IT outsourcing helps to overcome this bottleneck, so you can enjoy the flexibility and speed of tackling software challenges – without raising your overhead.

There is just one important thing you need to take care of before you start reaping the benefits of IT outsourcing – and it’s called the contract.

First things first: know your options

Outsourcing your IT operations to an external developer means several fundamentals need to be agreed on beforehand. Every project comes with a distinct set of challenges and requirements, which may change as the assignment evolves. Your contract and pricing should accommodate that dynamic too.

When it comes to software development, there are two main models: fixed-price and time-and-materials (T&M), each with its own pros and cons.

Fixed-price: from pocs to mvps and the other way round

Just as the name suggests, a fixed-price contract is an arrangement in which you know in advance how much a given project will cost. There is a budget allocated for a specific list of deliverables to be completed within a given timeline.


Both parties define and agree on the scope of work, budget, timeline, and products–usually leaving little or no room for any surprises or changes once the project kicks off.


While it may be reassuring to know how much you are going to pay, it can also be stifling. Fixed-price usually equals fixed scope, which allows no room for changes in the development plan. Changes are inevitable if you are after the legendary product-market fit or if you want to better align your users’ needs. If that’s the case, you will need a feedback loop much earlier than after two or three months of development.

Let’s be honest, identifying and specifying all features at the beginning is hardly possible. Some elements may turn out to be nearly impossible to create, while others will have to be expanded to be useful at all. With fixed-price, you risk either exceeding your budget – or sticking with an unusable product.


The fixed-price model will work best in:

  • Assignments with precise requirements and determined deadlines (aka ‘Waterfall projects’)
  • MVPs and other projects with limited scope, such as proof of concept – to check if your initial assumptions were right.

Time-and-materials: development, feedback, refinement

A time-and-materials model means that scope, budget, timeline, and deliverables aren’t strictly defined from the start. When you hire an IT consultant, you pay for the number of hours they work together with any additional costs of third-party tools they may need for your project.


T&M comes with some general goals and requirements, but it lacks any rigid end date or list of deliverables. This means you can scale development up and down when you need it – changes aren’t a problem.

Instead of listing all features before any development commences, you can start building and testing your product right away. T&M is indeed best suited to Agile project management methodologies in which teams divide work into smaller phases called “sprints”.

Usually consisting of 7 or 14 days, sprints let you better control whether the product you are building is solving the problem you envisioned it for. If not, you can figure out tweaks to get back on track. With each iteration, you give the development team feedback, fueling further work, refinements, and if necessary – a pivot.


The most common fear around T&M is that the project will exceed its budget. However, as each sprint focuses on business value rather than feature per se, you may finish work faster than planned. With T&M, you can have the first working features after one week, so you can provide feedback and amend course if necessary.


T&M will work best when:

  • dealing with a complex project with changing requirements
  • requiring the flexibility to modify the scope.

So which IT outsourcing model should you choose?

While crucial, selecting the right pricing model isn’t always easy. – In such situations, we always strive for a win-win situation. Of course, we want to ensure the best price and terms for the Client, but we also need to keep an eye on project profitability. If there are many unknowns in the assignment or its scope is still expanding, we usually suggest the T&M approach as it’s fair for both parties – said Łukasz Pol, International Sales Manager at Scalo.

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