The work style of interactive agencies is nearly incomparable to this of in-house teams. As opposed to enterprise employees, agencies are held accountable for every single man-hour.

It’s a necessity resulting from the characteristics of interactive agencies, that is taking ownership of a multitude of projects coming from different clients. In most cases, it requires a different payoff method than a monthly salary. There are two pricing models that stand out: fixed price and time and material. Let’s see which one better suits your needs, and why the latter one is best for app development.

Read also: Why Billing on a Time and Material Basis Is a Guarantee of Flexibility

A support that requires repetitive work or when you run plenty of projects that are similar in terms of man-hours needed to complete them. This model, however, is better suited for companies looking to increase their brand awareness through continuous activities.

Interactive agencies, especially those focused on software and web development, usually deal with each project separately, as longer cooperation in this field isn’t common or necessary. To reckon each project individually, they often use the fixed price model. However, this model’s imperfections can leave both the agency and the client unsatisfied.

Fixed Price Model: A Calculated Risk

So, what is the fixed price model all about? On principle, it assumes estimating both the price of the project and the time it will take to get it done up front. An estimation is based on a client’s needs, an agency’s experience, and pricing.

For an agency to estimate workload and a price, a client needs to deliver a very well-prepared specification of a project. This not only means a concrete and polished idea but also figuring out every single detail of every functionality. An agency has to have a detailed plan of action to be able to draft the pricing and estimate work time accurately.

But since perfectly-planned projects rarely ever happen at the stage of drafting an idea, agencies always calculate the risk of some changes to the projects that might and often do happen in the process of creation.

This, of course, bumps the price – sometimes just a bit, but the vaguer the idea, the bigger the price increase. The risk calculation works as a safety net for the agency side, but even that is often not enough.

This is how we arrive at the fixed price model’s first major drawback. Adding a calculated risk is a double-edged sword. On one hand, it makes a client pay more than a minimum. On the other, it doesn’t eliminate the possibility of not breakingeven for an agency.

Agencies can lose money on projects in the fixed priced model for a few reasons. For starters, it’s the significant changes to a project. Another cause may be misestimating the workload, which doesn’t have to be sourced in poorly done calculations before striking the deal, but, for example, in difficulties that couldn’t possibly have been foreseen (like a hard drive failure). Finally, agencies work with external contractors, who they rely on with delivering materials used for a project. An unexpected price increase of these materials will also be a blow for the agency side.

For an agency, agreeing to a deal means obliging to complete the project within an estimated budget. But even if it’s the agency that ends up on the wrong side of the deal, because the costs were higher than expected, it doesn’t mean that you, as a client, save money. In most cases, it means that you still overpaid, but not as much as you could have, and it can make the agency adjust the estimates for their future projects, so the calculated risk rate gets even higher. And while agencies underestimate the price only once in a while, the risk is added to the equation every time, so it is never a cost-effective solution for a client.

The second major drawback of the fixed price model is the lack of flexibility. A client has to be super specific, and know exactly what they want. In this model, there is simply not much space for presumptive changes.

If you’re delegating a mobile app development, and then, halfway through the development, you decide you want to implement another feature, you are basically ruining the agreed principles of cooperation.

Such interference in the ongoing project usually messes up two things. The first one is the budget. If the feature is a minor, separate functionality, you’re likely to get away just with an additional cost. But what if the feature interferes in any way with what has already been developed?

Coming up with a such a detailed and thought-over specification of a project is a daunting challenge itself. Moreover, it’s time-consuming, so it may not exactly fit the dynamics of a startup environment or app development, if you will.

With that said, it’s not like there isn’t any upside to the fixed price model. After all, something had to make it the most popular pricing model among agencies and their clients.

First and foremost, it’s the fact that you can find out about the costs of your venture before starting it. After submitting a brief with the specifics, an agency takes a few days to calculate an estimate, and that’s it.

Then, there is the deadline. With the beginning of the cooperation, an agency declares to deliver a finished project by a certain date, so you’re nearly guaranteed to get your product ready for when you need it.

Both of those upsides, however, can turn into downsides, as you will find out by reading about the alternative to the fixed priced model, that’s called time and material.

Time and Materials: As Dynamic as You Are

With the time and materials pricing model, a client pays, as the name suggests, only for the time and work put into a project by an agency. So, rather than knowing the price upfront, aclient is systematically updated about the progress and the costs.

Here we go, the first major difference between the two pricing models.

As mentioned a couple of paragraphs before, it is considered an advantage of the fixed price model, to be able to know the price before you agree on anything. As much as this is an undeniable advantage, it is at times the case, that the price turns away a potential customer from launching a project. Meanwhile, in the time and materials model, the price for the very same project could be considerably lower.

We’ve covered the price aspect, so let’s move over to the notion of time in the time and materials model.

To begin the work on a project, an agency only needs to be provided with the key features of the product.

Imagine Instagram’s founders planning to create their app as it is today. In the fixed price model, they would have to know what the big idea is, but also the details, like the ways of signing up (for example by Facebook and Gmail), methods of liking a picture (tapping the heart icon or double tapping the picture) or what filters they want in Instagram Stories. And trust us, these are only the most obvious examples.

With the fixed priced model, all they would need to know is that they want a social photo/video sharing service, where people can follow other people as well as be followed, and get likes on their pictures. Pretty much the rest would be figured out on the go.

We took this example to show how much time is saved with the time and material pricing model. Without the full specification, it is possible to start the project sooner for both sides.

Since it’s such a dynamic model, the specification isn’t needed, because changes aren’t nearly as costly as in case of fixed price. Adding even a major feature, like Instagram Stories, isn’t a big organizational challenge in the price and materials model.

Another thing is, that as much as the deadline is an important part of any project, it can be overly prioritized. While in the fixed price model deadlines are strictly followed, with time and materials deadlines are prone to be exceeded. And the reason for that is actually the latter model’s biggest advantage.

Namely, under the time and materials pricing model, the focus is on delivering a complete and polished product.

Take this video as an analogy to the point made above.

In order to achieve a polished product, in the time and materials model, it is necessary for both sides to closely cooperate. It means that an agency has to have a person qualified and invested enough in the project, to be able to continually and accurately reassess the stage of work and recalculate the costs. A person like this (usually a project manager), keeps the client posted and receives instructions for the further development of a product.

Choosing What’s Best for You

However this post may sound to you, we’re not going to say that one model or the other is the way to go. There are instances in which the fixed price model will be better for you, and other instances where going for it would be a mistake.

The fixed price model may suit you if you have a well-defined project, and you’ve spent months, if not years, planning everything ahead. It may also be a good idea if you have been cooperating with one interactive agency for a good amount of time, and you both know what to expect from each other. Finally, this can really be your only option, if you’re working for a firmly structured company, and have a strict budget for your project.

Pretty much in all other instances, it is hard to deny the advantages of the time and material model. Due to its flexibility, it’s perfect for, let’s say, startups which have a big idea, that’s going to revolutionize an industry, but don’t have enough knowledge or data needed to plan all the details, or simply don’t want to postpone the development of their app. Sometimes clients rely on those who back them financially, so it’s impossible to state that the plan won’t change. In this case, time and material is also the way to go.

Apart from the flexibility, the time and material pricing model is also distinguished by the focus on delivering a high-quality product, the ability to start the works right away, the capability of client’s involvement in a project, and finally – the second-to-none efficiency.

Interestingly, there also exists a mix of the two models, where a new price and workload estimate is created before the works on each iteration begin.

When planning to work with an interactive agency, it is thus important to know what pricing model is best for you. It may be a difference between the cooperation being a nightmare, and turning your ideas into gold.