IT company billing models: Fixed Price, Time and Materials, subscription

Before you start working with an IT company, it’s worth getting acquainted with the forms of billing for outsourced work. Today we will present the characteristics of each of the three most commonly used models, telling you for which needs and budgets they work best.

From our article you will learn:

• What are the billing models with an IT company and their advantages and disadvantages?
• What are the ways to oversee the completed work in each of the billing models?
• What billing model does Kotrak use?
• What is the hybrid billing model?

What are the billing models with an IT company and their advantages and disadvantages?

There are currently three settlement models in the market, which we discuss in more detail below:

• Fixed Price
• Time and Materials
• Subscription

Fixed Price

The Fixed Price billing model is nothing more than working on a predetermined budget. It operates on the basis of the Waterfall method, i.e. precisely defined conditions, stages and cooperation time.

When we start working with you in the Fixed Price model, we define the scope of services to be provided by performing a detailed pre-implementation analysis. This is binding and allows us to determine all phases of the project. During the analysis, we also define the functionalities and other activities that will have to be performed (e.g. data migration, integration with other systems, etc.). At the very end of the analysis, we establish the work stages and define the project budget in detail. And we discuss all this with you.

After your acceptance of the terms and conditions, we start the project work.

When does Fixed Price work?

The Fixed Price model is characterised by a low degree of flexibility, so it works especially well for projects where you know exactly what you want to implement and at what budget. It is also a good solution when you are not able to verify the progress of the programming work on an ongoing basis and only assess it after a particular stage has been completed.

Advantages and disadvantages of Fixed Price

Advantages

Fixed Pricing allows you to predict the cost of a project in advance. It is initially estimated as an 'order of magnitude’ and then, after the pre-implementation analysis, the work stages and all the expenses are fleshed out. In this way, you know what the cost will be, the scope of the activities and the time taken to complete them.

Disadvantages

The main disadvantage of Fixed Price, highlighted earlier, is its low flexibility. By design, it is difficult to predict, especially for projects lasting a long period of time, whether the need to make changes to operations will arise. These may arise for various reasons, such as changes in your business or legislation.

When the modifications are large enough to affect the budget, they have to go through a change management procedure (eng. Change Management), i.e. they have to be submitted, accepted and implemented. This procedure can not only change the cost of the project but also prolong the work on it. Especially if the need for Change Management occurs more than once.

Time and Materials

The Time and Materials model is a form of billing based on the work done in a given period of time. It is characterised by a so-called agile approach (Agile/Scrum), which means that work is carried out in short, measurable phases during which you have a constant overview of the progress of activities. Based on the completed phases, the work is accounted for.

The guidelines we follow for the Time and Materials method are established at the very beginning of the cooperation and can be based on:

• the number of hours per month that the project team is expected to devote to activities,
• the budget range you have set, which you do not want to exceed in any given month.

With these assumptions, you can be sure that the costs of working on the project will not surprise you and that you have control over the work carried out.

When does Time and Materials work?

Time and Materials work well for projects that need to be continuously developed, such as social media applications, browser-based programmes or systems for constantly evolving industries. This method is ideal for solutions that need to be updated to changing market and audience needs.

Advantages and disadvantages of Time and Materials

Advantages

The advantage of Time and Materials is, in contrast to Fixed Price, a high degree of flexibility. Businesses change frequently, adapting to new requirements, legislation and trends. This billing model allows greater freedom of action, as changes no longer go through the Change Management procedure.

Projects prepared on the basis of the Time and Materials model also allow research and analysis of new features before they are permanently introduced into the system. This is nothing more than making so-called BETA versions, i.e. test versions of new functionalities, available to users in order to verify their correct operation and to test whether they are popular.

Time and Materials also allow creative freedom for the professionals working on the project. As the project is not locked into a predefined framework, project leaders have more scope to demonstrate their knowledge and creativity.

A final advantage worth noting is that it is easy to evaluate both the individual stages of the project and all the work carried out and to demonstrate further planned activities.

Disadvantages

The Time and Materials model requires ongoing control of both the work carried out and the budget. Costs are usually set within a pre-defined range but can change and increase in exceptional circumstances. The budget in this model is often planned from month to month, depending on the amount of work needed to be carried out, so the value of the budget can constantly change.

Subscription

The last billing model discussed is the subscription. Operating on this basis, we agree with you on a specific amount, paid monthly or quarterly. Within this budget, we calculate the working hours during which we perform certain activities.

When is the subscription checked?

Subscription is the method best suited to systems that are already up and running. It usually includes helpdesk support, allowing for system maintenance or minor application development. In this model, you always have costs under control and know where the work is heading.

Advantages and disadvantages of subscription

Advantages

The big advantage of working in a subscription model is that you are aware of the budget we have for the activities. It is set over a longer period of time, giving you constant control over your expenditure. It also allows our specialists freedom of action, as they don’t have to constantly ask for approval of new costs when commissioning minor changes. Everything is timetabled according to the agreed financial resources.

Disadvantages

A disadvantage of this billing model may be a poorly structured subscription contract, that does not correspond to the real needs of your business. It is also a model where it is difficult to go beyond its original intent. Any changes in the way or length of work require new provisions in the contract.

Remember, too, that abrupt and large modifications to the way you operate with a subscription can also be problematic. For example, a sudden need for a significant increase in the number of specialists working on your project can be a problem, as this is not always possible immediately.

What are the ways to oversee the completed work in each of the billing models?

In the Fixed Price model, we report on the status of the project. It all depends on its size and the degree of your involvement. At Kotrak, we prefer partnership and open collaboration. We prepare presentations or upload test environments to give you a comprehensive presentation of the progress of your activities.

As for the settlement itself in the Fixed Price model, it takes place after each completed stage or in two parts, e.g. an advance payment and a final invoice. We always try to adapt the form to you and your capabilities and needs.

Operating on a Time and Materials billing system, you are kept informed of the work being carried out. As we mentioned earlier, they run in the company of short sprints and you can constantly monitor them. The completed activities are then presented to you in the form of presentations and submitted for testing. This agile approach allows changes and your feedback to be implemented more quickly and, therefore, a solution tailored to your needs to be prepared more efficiently.

Operating on a subscription basis, we usually carry out maintenance and minor system development work for clients. The work performed is presented in periodic reports, and you receive a designated Support Service Manager through whom you report tasks, as well as staying in touch when there are questions and issues to be clarified.

What billing model does Kotrak use?

At Kotrak, we meet the needs of our clients, which is why we use each of the above-mentioned billing models.

When starting cooperation, we first pay attention to your needs and the scope of the project, and then we propose the best model for these factors. Based on these elements, we construct a cooperation agreement and start working.

What is the hybrid billing model?

Of course, these three billing models can be mixed together, depending on your needs. At Kotrak, we often start our cooperation with Fixed Price. This form allows us to study and learn about your needs and the specifics of your business in detail, as well as to prepare the core of the project or its entirety.

When the subject of further application development and maintenance comes up, we usually switch to a hybrid cooperation model. Initially, we work with the Time and Materials system, designing, testing and implementing new functionalities. Once the system is fully up and running and only requires maintenance and minor development, we switch to a subscription contract. This allows us to carry out work adapting the application to, for example, changes in legislation (like GDPR).

The article was written in collaboration with Paweł Paszkiewicz, Software Development Director

(Read more about what comprehensive IT services for companies at Kotrak cover.)