Are you doomed to fail your IT project? Hourly rate vs. fixed price discussion

We know that choosing a good process to handle your IT project can be a headache. At first glance the fixed price might seem like the best possibility, but in fact it’s the hourly rate that seems to be the only reasonable option. What is more interesting, it is not even a matter of choice anymore. The software development landscape has changed so much recently that there is a high probability you will fail your project with fixed fee approach. Why? We will tell you now.

Project management models

First of all, both billing options are direct outcome of two different project management models – agile and waterfall.

Waterfall model is a sequential process. Planning, designing, coding, testing, and launch are consecutive phases that you need to complete one after another. This process doesn’t support changes very well – they often result in significant delays and going over the budget. In waterfall methodology, fixed bid is its ensuing characteristic. With agile model on the other hand, developers are able to optimize their workflow, by dividing the project into smaller sprints. Thanks to that, they iteratively plan, design and develop project’s components which results in continuous delivery. Agile methodology allows the team to make changes in the scope, fix bugs as soon as they come up and deliver the product faster. That’s why the other name for the agile contract is “time and material”, where hourly rate is a basic form of billing.

Statistically, agile model has around 40% project’s success rate, whereas waterfall model only 11%*. It may seem to be a simple choice for clients.

Money, money, money…

Now, even if the agile approach seems like a great idea, an important question appears: “How much it will cost?”. At this point, not everyone is aware that IT projects evolved so much! We are no longer talking about building simple websites but rather about building real Internet companies. Most successful applications require constant attention and development support. We mean user feedback, scalability issues and changes on the market- just have a look at Uber. That’s why when it comes to counting expenses, it’s difficult to predict the exact final costs of the finished process.

This might be scary, but it is a new reality. You’re working on your business, not a small project with a definite ending. Fixed fee doesn’t have any support for this. You are reassured about your budget, but as a matter of fact you must repeatedly renegotiate agreements. There is a very real danger of delays and low quality product.

With billing per hour the situation is completely different. Progress is measured on a daily basis so there is a possibility to react quickly when something is going wrong. It’s also easier to make sure you’re making the most of your budget by prioritising the most important features and frequently testing them with the actual user. With simple and transparent billing, you pay only for the time spent on the project and the work that would have to be done anyway. Not the artificial buffers and premiums for vendor’s risk.

Cooperation issues

Another important matter is the cooperation between the client and a software shop. It is way easier for the team to understand client’s needs with the agile model. Thanks to frequent meetings, clients have bigger influence over a product and are able to constantly improve their assumptions. Regular insights into timesheets, project stats and team performance data allow them to make the best project decisions.

With the fixed price approach little project information is shared, so you don’t really learn much in the process. It’s not that waterfall is bad to the bone but team morale and work atmosphere is lower than with time and material. It may not seem obvious but there is a hidden conflict of interests in fixed bid billing. When the team hasn’t finished the project but has already depleted the whole budget. In overwhelming number of cases contractor’s mood is going down. And client is left frustrated trying to keep the remaining features in the scope. As a result, no one is pleased from the cooperation. Both sides want to finish as soon as possible, without caring for the product quality. That is not a good prerequisite for the long term relationship.

As we’ve mentioned already, fixed fee is not totally bad and unacceptable. There are some situations, where this approach will work. We are talking about small, predictable projects. Where everything can be planned in 100% before the start, like a corporate website or building a house.

What to do?

To sum up, you’re probably doomed to fail your Internet business if you insist on a fixed price option. Surprisingly, you’re going to spend more than planned. Even with the “safety buffer” used in the estimate to compensate for risk and uncertainty. Cooperation with the chosen team of developers might be a nightmare after some time. Most likely you won’t be satisfied with the quality of a finished product. Do you truly care about your business and you think about the long term success? Hourly rate is the way to go.


* The 2015 CHAOS Report by Standish Group