A story about different payment methods told by a PR Specialist and a CEO

Max B, CEO
Max B, CEO
Nov 8, 2023
7 minutes

What Are the Options for Paying Developers?

Fixed Price

This is typically used for projects that don’t last more than a month. Or projects with clients from the 2000s.
Time & Material (T&M)
This is used for projects that last 2 months or longer and involve paying for the man-hours of the employees involved.
Dedicated Team
This is used for long-term projects that require constant development. That is, you plan a constant workload in the form of development and support.
I constantly face the need to talk about the pros and cons of payment options. But most often I have to prove that Fixed Price is a complete illusion. So I decided to look at all the options using real-life examples.

Fixed Price

Obviously, a lot of people like this payment option because you know in advance how much you’re going to spend. You’re sure you won’t exceed the budget. Or that you won’t get billed for any extra hours of work.
Yes, and you have to fight those beliefs. Because for us, as a contractor, there is only one scenario where Fixed Price is disadvantageous, if we have not studied the ToR and did not notice any annexes. And for the client, there are three scenarios.

Provide for everything

A manager, from experience, tried to take into account any nuances (even those with a 0.01% probability) and put up a sum of x10. Although to calculate everything over 100 hours is a bad shot. And compare the ‘inherent risks’ of 30% at 100 hours and 30% at 600 hours.

Not to provide for everything

From the beginning, a client did not account for everything (and he certainly did not account for everything), and he will face additional expenses. After all, Fixed Price means fixed tasks. Therefore, the result is a larger price than the original.

No imagination

Work is built clearly according to ToR (no shifts), each new stage starts after the previous one. Have you come up with some perks in the process? Expect additional costs, new deadlines, new document approvals, etc.

Time & Material

You can control both the upper budget threshold and some specific deadlines. That is, the client limits the amount he or she is willing to spend on the project, and the manager keeps track of how the money is spent. Or, for example, one of our customers wants a project to be finished by December, and at the same time he or she throws all sorts of ideas, the manager evaluates the timing of their implementation and advises what is better to abandon in order to meet the deadline.
You can make a decision yourself in the course of work, such as to stay within the estimates or do what’s best.
It’s like in the renovation. For example, the estimate you indicated included painting the walls in one layer, and in the process, it turned out that something else needed trimming and now you need to paint in two layers. And you are offered different options: to make the project more expensive, but do it perfectly. Or do it the way you were going to do it because you just need an MVP.
It is possible to change the ToR in the process, to shift priorities. With a fixed price, they would do what was written and what was calculated. But here it is easy to move, to abandon some long and expensive features in favor of faster and more profitable product implementation.

Dedicated Team

Okay, if it’s not a Fixed Price, that’s probably the coolest option, right? For us, it’s a guarantee of constant team load and the absence of a bench. For the client, it means full attention to the project from the developers and management. They work only on his/her tasks, they can change priorities during the work, and show results on sprints. They are interested in the result, so they can deviate from the ToR to offer other mechanics and approaches.
On the whole, you’re right. But from our practice, people involved in one project only burn out. We had a case where after a year of working with a cool, awesome and large-scale client, the team got tired. They wanted new experiences, fresh tasks, and in general to shake off the routine. That is why we had to change the guys and delegate the tasks. But these man-hours fell on our shoulders. So the client was not affected in any way.
T&M is the most humane way to pay developers.

How to Control the Work When Paying by T&M?

If with Fixed Price and Retainer clients don’t worry about being cheated, the T&M format seems the most vulnerable. What if they are cheated? What if they bill more hours? What if they won’t do anything?
That’s definitely true. Plus lawyers can also cut in and interfere with the process. They also don’t understand what T&M is and how to settle disputes. A lot of paperwork begins, which comes down to trying to describe everything in the ToR from the start, to lay down the risks. And we still go back to Fixed Price. The lawyers are happy. But what they really don’t get is that we’re not going to work at a loss. So, if anything, the client will have to pay extra.

How to collaborate when paying by T&M?

Agree on a list of work before each reporting period, and request a report after it is completed.
Agree on how often the manager will update you on the progress of the work. For example, call once a week to reconcile what’s been done as planned.

Record and discuss intermediate results so that you can adjust the work and tasks.

How else to negotiate everything beforehand?

Limit the budget for the MVP within a contract.
Outline the allowable discrepancy in hours of work.
Fix a budget ceiling.
Negotiate what is included in the cost of the project. For example, calls and discussions with developers also count. Because in some projects there may be up to 8 hours of calls a week. This is also the work of the developer, and it is also paid.
Establish internal processes for tracking hours and fixing the work done. We track hours, and at each mark, the developer writes what task it was related to, and what he did. As a result, you always have a log of the work in relation to the time spent.
T&M is a model where the customer and the contractor interact as partners and look for a solution together.

Which Format of Cooperation with Outsourced Developers Should I Choose?

If your task is a landing page, promo website or any other clear and simple product, choose Fixed Price. Especially if there is a design, texts, and thought-out structure. For example, we do not accept such tasks for work, so this form of cooperation is not considered. Especially after one case that I described on my Linkedin page.
If you are implementing something new, for example, automating the work of sales managers by creating personal accounts, or converting a loyalty program into the application format, it is better to choose T&M. This is more effective both in terms of budget and development.
If you are planning to build a global infrastructure, in the basis of which you must think through the logistics, integrate web, mobile, and then fine-tune the services for internal use, it is better to resort to Dedicated Teams. Because they will be involved in the project from the start and will be able to consider all the nuances from the start. It is important to also consider website maintenance, enabling you to make informed decisions on how to support your website in the future.