Why We Stayed Away From Fixed-Price Projects

Why We Stayed Away From Fixed-Price Projects
Michel Cohen

Let’s say a lawyer takes a client’s case for a fixed price, keeping in mind that it’s relatively simple, and it will probably take a short amount of time. But days later, new evidence comes to light, and witnesses make the case all the more complicated. Should the lawyer keep the initial price? No. In fact, this is the exact reason why most lawyers would think twice before setting a fixed price nowadays, and many work per hour, regardless of how “simple” a case may seem.

The same applies to the needs of software development projects. They can grow, change, or vary. Why, then, should we expect a contract to predict a project’s present and future needs?

Because it’s not possible to know how a project will evolve, we prefer to use a flexible approach. When we work on a project, the time and materials (T&M) modality allows us to focalize, adapt, and scale according to its needs. That is, to fully understand the client’s priorities and meet them thoroughly, in a customized manner.

Fixed-price versus time & materials, what’s the difference?

T&M is a working modality in which the client agrees to pay the provider for the time spent by its team and the resources used to perform the job, regardless of how much of both aspects are needed to complete the project. Both parties agree on a rate per working hours and for materials used, but there is no fixed budget for the project.

This method has a number of benefits. It’s easy to set rules up front about the materials to be covered and the rates for time spent on the job. It’s also easy to set a limit on what can be developed and to plan accordingly. Additionally, this modality allows the provider to be highly productive on a project even if the scope or priorities change.

Conversely, the fixed-price modality defines the services to be performed quite specifically and stipulates the total price. Payments are made upon reaching predetermined milestones in the contract (in some cases they are reached only when the project ends).

When the client changes the defined scope of work or requests something outside the contract parameters, the supplier must charge additional fees. Consequently, the project manager working under a fixed-price agreement must be as familiar with the contract as possible to stay within the project scope.

Our experience

Since we founded the company in 2018, we have executed many projects with both fixed-price and T&M structures, which enabled us to learn key lessons about which one benefits a project the most. But if there’s something we’ve always known, it’s that, as a company, we seek to create products with the highest possible quality in all aspects. It’s because of this approach that we decided to create a hiring pipeline that’s unique among software companies, looking for only the best across the continent. This same quest for quality led us to leave fixed-price projects in the past.

Remember that, in a project governed by a fixed-price agreement, the provider must contain external influences, as well as problems and learnings that may arise on the fly, since they can prevent on-time delivery. This rigidity becomes very detrimental to the quality of the final product.

Such agreements often end up with lengthy contracts and other commitments designed to act as insurance against non-delivery. So, the project becomes a source of continual disagreement about scope and cost. The outcome is an inflexible product reflecting an idea that may have been identified a year before when market needs were different.

The outcome is an inflexible product reflecting an idea that may have been identified a year before when market needs were different.

Additionally, with each fixed-price project we worked on, we realized that defining the scope before moving forward required a lot of time and energy.

In many cases, near the end of the project, the client wanted more work to be done than agreed, insisting that, although it had not been specified in the contract, the additional work was “obvious” or “implicit.” Needless to say, these demands created problems for team productivity, as a lot of energy was invested in determining who was right. Seeing how product quality suffered from investing energy in defining the scope in such detail and resolving conflicts every time changes arose made us realize that the fixed-price approach wasn’t the best way to develop high-quality products.

Seeing product quality suffer every time changes arose made us realize the fixed-price modality stands in the way of high-quality products.

Furthermore, the documentation for a fixed-price project is usually extensive, inevitably including many inconsistencies and errors that must be resolved before the project starts. This process can be time consuming and delay the start of the project, allowing the competition to get ahead. A team can spend months on initial documentation before starting the job, and many times the provider must hire an expert analyst who doesn’t miss any detail. Spending so much time in preparation that could be spent on the actual project just isn’t efficient.

We saw that this way of working was especially detrimental to startup projects. Since a startup is still learning how the market works and what potential users expect, most need to work with agile methodologies, which give them the flexibility to change priorities and redirect work based on new knowledge and external problems that arise. The flexibility and adaptability inherent in these agile methodologies clearly contrast the rigidity of a fixed-price contract.

However, it was one particular experience that made us realize the seriousness of the situation and led us to make a final decision. It happened when we decided to work with a problematic client on a fixed-price project. The usual challenges arose, including long discussions to define the project scope and extensive documentation. But this time, the situation went further. After we moved on from the initial phase, working hard on the project, and even completing 95% of it, the client stopped making payments, leaving 60% of the agreed payment unfulfilled. This experience, although painful, opened our eyes to reality: taking on fixed-price projects was incompatible with our goal of generating high-quality results.

So we left fixed-price projects behind and decided to only accept projects for clients  who value having a highly trained team and are willing to allow that team to take responsibility for steering the product in the right direction. As they put forth the ideas of ​​what to implement, and we execute it in each work sprint, these clients place quality at the same level of importance that we do. This way, our efforts are united with our clients’ wishes toward a single objective. 

We left fixed-price projects behind to accept projects for clients who are willing to allow a high-end team to steer the product in the right direction.

Making this change allowed us to grow as a company. As we focused on projects with dynamic scopes, clients whose priority it was to achieve a minimum viable product (MVP) and go to market quickly learned and iterated new versions. This flexibility gave us the freedom to share ideas that benefited the products and offer creative solutions to obstacles or unforeseen events that arose. So now we use the same process to create state-of-the-art products in which we learn much more than expected.

When working within a T&M structure, it’s in the best interest of both the provider and the client to ensure that the actions of all parties are organized and well-focused to minimize or eliminate waste of project resources. 

Discussions focus on what is best for the product and how resources can be used in the most efficient way, not the contract or scope, so we’re able to better focus on the client’s interests. They put their ideas and resources in our hands, and it’s our responsibility to ensure resources are used wisely and for the benefit of their business.

Discussions focus on what is best for the product and how resources can be used in the most efficient way, not the contract or scope

Quality-driven, dynamic projects—we’re here for you!

Fixed-price projects, due to their rigid nature, focused on the contract rather than the product, hamper team efficiency. They even stand in the way of the client’s best interests.

Having switched to an all T&M approach, our team strives to provide quality service and contribute ideas to benefit our clients, who have been more than satisfied with our work, as is evident in our Clutch profile.

What about you? Do you value quality as much as we do? Write to us and tell us your ideas. We will be happy to give your project the boost and quality you need.