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Time and Materials Pricing Model: a Balanced Approach to Project Budgeting

The T&M (Time and Materials) pricing model conveniently occupies the middle ground between the rigid fixed-price approach and the remarkably flexible dedicated team engagements. This model is very commonplace not just in software development, but pretty much everywhere else where the scope of work can be initially defined only so accurately and where more tasks are expected to become clearly visible in the course of the project.

In this pricing model, the customer pays the contractor for the hours actually spent working on the project and covers any other additional approved expenses, like the work of subcontractors, license fees and such. The model offers transparency and appeals to many customers thanks to its innate “fairness” and understandable nature. In a great many situations, T&M is the only reasonable, if not just viable, pricing model that enables a project to lift off without major commitments made by either party.

Benefits for the customer

Customers choosing to go with the T&M model share the responsibility for the outcome of the project with the contractor, which naturally motivates both parties to pay attention to filling the backlog and tasking team members in due time. The time and materials model gives the customer a fair deal of flexibility in terms of dynamically adjusting the size of the team to align it with the current production needs and moving deadlines, if necessary. In addition, projects can be started with partially defined requirements and new resources can be added on the go as the scope becomes more visible and detailed.

This pricing model offers the customer full budget transparency through detailed expense reports and spending projections provided by the contractor at the end of each billing cycle. In addition, the customer can limit the weekly/monthly budget (T&M NTE – Time and Materials Not to Exceed) for extra protection from budget overruns.

The T&M model can be used in combination with any project management methodology, but is typically used with either Kanban or Scrum, where the scope of work is defined and redefined dynamically and tasks are frequently re-prioritized.

Benefits for the vendor

The key advantage of the T&M model for the service provider is the ability to quickly utilize benched resources on an ad hoc basis while enjoying higher rates (in comparison with the dedicated approach), which are a trade-off for the lack of duration-wise commitment of the customer. As a rule, the parties agree on the minimal workload for the team prior to starting a project, which gives the contractor a steady stream of revenue. And since there is no requirements elaboration stage preceding the start of the project, resources can be assigned to a project immediately. Similarly to a dedicated team, resources provided under this model can be unmanaged (reporting directly to the customer) or managed by a coordinator on the supplier’s side.

Applicability and conclusions

The T&M pricing model is a perfect choice for R&D projects, proof-of-concept research, MVP development and fast, yet temporary, augmentation of an already existing team lacking the capacity or expertise for delivering particular features. Flexible and scalable by nature, the model can help jump-start the development of a project even if the timeline and the scope are only partially defined, which is especially relevant to startups working on early versions of their applications. T&M assumes the minimal amount of administrative procedures and preparations and allows both parties to get right into action just days after the initial contact, if resources are available and ready.

Cortlex has been using T&M along with Fixed-Price and Dedicated Team models since the day of its foundation and will be happy to discuss how you can benefit from this approach to development and project budgeting. We guarantee that if you choose Cortlex as your development partner, you will be guided all along the way and will have full visibility of progress, costs and projections for the observable future.