Have you ever faced a pricing dilemma while managing the projects? What were the business losses associated with those dilemmas? Do you think they could have been avoided with the right choice of pricing model?… Every manager encounters such questions while deciding project pricing strategy.
As you might be aware, there are two models for pricing- Time-and-Material (TnM) model and Fixed-Pricing (FP) model. While both the models are widely used, TnM is becoming a popular choice due to the increasing project complexities and competitive business environment. Before we get into the details, let us understand how these models work.
In the FP model, a fixed cost is quoted in the contract before the commencement of the work. Once decided, there is no scope for price change except the amendments in the contract, which can be a tedious process. Hence, such contracts are used only when the project scope is very well defined and when there is high confidence in the estimated cost. On the other hand, the TnM model comes with price flexibility. Instead of quoting the fixed price, the contract specifies the project’s objective along with the hourly/ daily wage rates plus material/ resource cost. This makes the TnM model more suitable for a dynamic business environment where project needs are uncertain and the scope is vague.
Choosing a suitable model is not easy and is subjective to various factors such as market conditions, vendor-client relationship, willingness to spend money, resources availability, nature of the project, etc. Here are a few of the challenges faced by the industry while selecting the pricing model for the project.
1. Lack of trust and transparency: Pricing is a sensitive matter that needs mutual trust between the concerning parties. While working with new clients, it becomes even more challenging to gain that trust. Lack of communication, the limited scope of intervention during the project, and an inaccurate projection of time and resources may lead to trust issues. This problem is much more relevant in the case of the FP model. Trust gets lost with questions like whether we are being charged correctly or fooled for effort and time? With TnM pricing, such questions get answered automatically. Time and resource projections are shared regularly to ensure both parties have transparency in the resource planning.
2. Changing Scope of Supply: In most cases, the project scope is not fully defined. Over time, as the project progresses, addition is done to the scope, the old scope is amended, and new requirements are discovered. The projections on the resources (Time and price) calculated when signing the contract becomes irrelevant. In the TnM model, since the price is directly proportional to the resources needed, the vendor and the client have clarity on why there is an additional requirement and in what quantity. Contrary to this, FP models are like the black box, where you know the inputs and can visualise the product in your head. As a result, The certainty of getting the expected outcome reduces with every change in the project’s scope.
3. Extended cost: No one wishes to have the price extended. It becomes challenging to make people understand the extra resources required during the process. There can be various hidden costs that the vendor might discover during and after the discovery phase of product development—for example, fixing the bugs, adding extra security, dealing with external market factors, etc. Thus, the project usually never ends at the said price. The fixed cost model suffers a lot while handling such issues, leading to lousy client-vendor relationships, delayed delivery, or even contract termination.
4. Incomplete projects: As the products mature over time, a few requirements are unforeseen when finalising the contract. The client claims that he has already paid enough for the project. The Vendor claims that the time and resources he has invested in the project are higher than the money he has received. Material prices and labour rates increase with time in long-term projects, which is not captured in fixed-cost projects. As a result, such issues remain a topic for discussion, and the project never reaches the completion stage.
5. Clashes between vendors and clients: All project scenarios cannot be visualised at the inception stage. Cost and resource estimations done at the initial stages thus do not match the final estimates resulting in a strenuous vendor-client relationship.
6. Chances of losing the bid: Inaccurate pricing can make you lose the opportunity. In fixed cost pricing, if the estimation is too large, there is a high chance that you will lose the project to a lower bidder.
The project’s success is decided by how well you manage all these challenges. TnM can help overcome these issues. TnM pricing can deal with the dynamic scope of the project. It can accommodate the change in resources required as the project proceeds. It ensures more satisfied customers with better management of resources. The project gets delivered in time, and both parties can track the resources utilised to complete the project. TnM pricing offers agility in the negotiation terms and conditions of the contract. In case of unforeseen events or additional needs, the terms and conditions of the agreement can be modified. TnM pricing provides better conditions of work by improving the timings. It caps the maximum working hours and makes the work timings flexible. Since transparency is ensured in all the stages in TnM pricing, the accountability of the vendor and client increases considerably. This also helps in faster decision-making. The probability of the project getting stuck with the price change approval, scope change approval, approval on the need of additional man-hours, etc., is low. TnM pricing also opens a pool of specialists around the globe. You can have your preferred specialists in the team based on the project’s requirements. The cost of having a permanent, highly specialised person in a team can be very high. TnM pricing helps minimise this cost by employing them on a need basis.
Overall, TnM pricing simplifies time and materials management, makes the pricing accurate, ensures flexibility, promotes transparency, and enhances client and vendor trust. If you are uncertain about the resource requirements, cost, project timeframe, profits, etc TnM can be the option for a successful project.
Contact us if you are interested in developing an application and would like to understand more about TnM pricing.