<img height="1" width="1" style="display:none" src="https://www.facebook.com/tr?id=1639164799743833&amp;ev=PageView&amp;noscript=1">
Time and Materials or Fixed Bid: What Is Your Best Payment Approach?
Diagram Views

Time and Materials or Fixed Bid: What Is Your Best Payment Approach?

Industry Insights
Published by Bill Casey on 10.9.14

When planning a website redesign project, Diagram has two approaches to payment for our services. Learn about the appropriate uses for each one.

As much as we prefer to focus on design and technology when talking to our clients, money is a crucial part of any website development project discussion. Unlike commodity purchases such as software or computer hardware, a website is a largely intangible product, and the cost of a website redesign or rebuild varies greatly from site to site and client to client. We make it our responsibility to remain transparent and honest about how we determine our pricing and always strive to offer a fair value for the service received. However, pricing a web development project is an inexact science, and how the payment terms are structured can be a significant factor in avoiding unwelcome billing surprises.

When we approach quoting projects, there are two payment methods we consider: Fixed Bid and Time and Materials Payments. Each of these methods has their advantages and disadvantages, but understanding which is best suited to a project can be determined based on a few general guidelines.

Time and Materials (T&M)

The most simple and straightforward pricing method is Time and Materials pricing. Simply put, you pay for the time and materials spent to complete a certain project based on a flat hourly rate or rate scale. While not the best model for many large projects, it does have advantages if certain factors are present:

1. Smaller enhancement projects and support

In a partnership model like we employ at Diagram, we will often perform multiple projects for a client year after year. Generally, this involves adding new functionality or other enhancements to an existing site as we meet the evolving needs of the organization. When these projects are relatively small and involve only a few people, the most efficient and cost effective way to proceed is through T&M - you pay for the resources you use as you use them. This is particularly true in a maintenance and support relationship where ongoing 1 to 2 hour requests are the norm. Individually pricing each of these requests would not make any sense.

2. 99 problems and money ain’t one of them

Ideally, every project we undertake has a well defined scope and a clear value and purpose, but in the real world, things don’t always work out this way. Sometimes, a vague end goal is understood, but immediate progress is needed to solve urgent short term problems and help bring clarity to what options are possible in the long term. We often take on clients whose current site design and architecture is stopping them from making progress on whatever goals they’ve set out for themselves (more revenue, more leads, better communication, etc.). They can’t even begin to think about the future that can be until they fix the present that is. When a large scale triage/diagnose/fix strategy is needed, T&M pricing allows you to begin work right away and throttle the effort to meet budget limitations.

3. Uncertain scope

Sometimes, there is no defined scope by intent. There is a general goal that needs to be achieved, but knowing how it will be achieved before starting is not important, nor are there resources devoted to figuring it out. Some clients are happy to pay by the hour for the process of simultaneously strategizing and building as they go, making key decisions on the fly. This Agile approach is popular in software development with multiple development iterations and sprints defining the process. This is a fantastic way to make incremental progress with a high degree of flexibility to make changes along the way as the scope gets better defined. The final cost won’t be known until the project is complete, but if ultimate flexibility is desired and predefined scope is not possible, this is a good way to go.

Fixed Bid

Fixed bid (a.k.a. "fixed fee" or "flat fee") pricing is used to bill a fixed amount for a specific web development project. The primary advantage of fixed bid pricing is you know what you’re going to spend before you spend it and can plan your budget accordingly. However, this approach is not well suited for all projects. When we provide a fixed bid, there are certain expectations we have that need to be met in order to ensure the success of the project:

1. You must be willing to invest in scope definition.

A well defined project scope is essential in preparing a fixed bid quote. All of the project details, such as design requirements, technical architecture, integration points, CMS implementation, etc. need to be clearly defined and understood by both parties in order to prepare an accurate estimate. Furthermore, there should be a deep understanding of overall goals both for the project and how it relates to the overall goals of the organization. This is usually accomplished through a series of in-depth planning meetings between stakeholders, site designers, architects, and strategists. This paid engagement, referred to as Discovery, helps build a blueprint to guide the design and development teams and ensure that all of the project requirements are met and completed within a set timeline and budget. While the cost of Discovery varies depending on the complexity and requirements of the project, it is an added cost that should be accounted for early in the process.

2. Be prepared for change orders

Unfortunately, no amount of planning will eliminate the possibility of scope change. Stakeholders change their minds, business realities are fluid, and initial requirements can change once the site begins to take shape. We understand that this happens and try to accommodate unforeseen changes as fairly as we can, but when new or changed functionality is brought to the table after the scope has been verified, billable change orders are generally used to compensate for the additional required effort. In highly budget-restricted projects, change orders can be problematic and can cause delays or sacrifices to other areas of the project. With any fixed bid projects that we negotiate, we usually inform the client to prepare for 15-20% in additional costs for change orders. Ultimately, this may not be needed, but unexpected and un-budgeted expenditures are a surefire way to derail a project.

3. Understanding Value vs. Hours

A common interpretation of fixed bid pricing is that it is simply a guaranteed time estimate, saying that we expect the project to take X hours and will not charge any more or less based on the final number of hours used. However, a good fixed bid ultimately comes down to the perceived value of the project instead of a simple the estimate of the number of hours it will take to complete it. How this value is determined takes insight and careful examination of data. While time does still have some influence in determining price, a value estimate is determined by answering questions such as:

  • What business goals are you trying to achieve?
  • What kind of revenue increase are you looking for?
  • What is the cost of not doing anything?
  • What is your client acquisition cost?
  • Do you want a new website design, or do you want to visually enhance your brand to build your industry credibility?

As you can see, the conversation is no longer about hours; it's about designing solutions that deliver real results and solve real problems. That’s what we want to focus on when providing our services, not figuring out how to produce something in a set number of hours. True value is what drives a fixed price, not time. Our job is to make you feel like every penny spent was worth it.

Do you want to learn more about how Diagram can help your website meet your business goals and provide the best return on your investment? Sign up for a Free Budget Consultation, or feel free to contact us to speak with a Solutions Engineer.

 

Have questions or comments about this post? We'd love to hear from you.