Financial matters seem straightforward, even in the IT sector. However, it turns out that the issue is more complex than it appears. The complexity of services or products provided by IT companies is so high that payment matters keep clients, vendors, and project managers awake at night. What should you pay for? When? How to price a project? All these questions affect payments in the IT industry.

At the outset, it is worth noting that when choosing a financial payment model in IT (and probably not only in IT), much depends on the client's decisiveness, thorough completion of the brief, and the complexity of the project.

Payment models in IT

There are two primary methods of financially settling an IT project. The first is fixed price, a rigid price model, and the second is time and material, payment for "time and materials." Both payment models have their pros and cons.

Fixed price: known cost upfront

This payment model works primarily for fairly simple, predictable, and easy-to-estimate projects. This is because the contractor must receive all the information about the project. Each variable means an additional cost that will affect the final price.

An example of a simple project settled this way is creating a web application. After thoroughly completing the brief, the project manager (or the person estimating the cost on the contractor's side) will be able to accurately estimate the costs for the contractor. It is essential for the client to know what the application should look like, how many views it should have, what should be on them, what graphics or animations will be needed, etc. After calculating all this, the client will know the cost and time required for the service. This is the fixed price model.

Time and material: paying for time and resources

Payment for time and resources is the best solution when the project is complex. Often, it is not known exactly how much work will be needed to complete it; perhaps a lot of work will arise during the project. Then it is better to agree on an hourly rate with the client and inform them about the required resources, such as purchasing licenses or ordering appropriate infrastructure.

It is worth noting that the time and material model does not mean informing the client about the project costs on the last day of its duration. A good practice is to set, for example, monthly payments based on work reports or settlements based on milestones or sprints, the key stages of the project. Sometimes a cost limit is also set. An example of a project settled under the time and material model could be data digitization and transfer to a public cloud. It will be challenging to estimate for a client who has several servers, dozens of workstations, and three cabinets of important documents – all of which need to be transferred to the cloud. Therefore, it is best to adopt the time and material settlement form.

Pros and cons of fixed price in practice

Let's assume we have a small and predictable project to implement – creating a web application.

Due to its advantages, we choose the fixed price model for settlement with the contractor:

• The price and completion time are known from the beginning of the service.
• The project does not require too intensive contact between the client and the contractor.
• The contract and rigid schedule give the contractor a sense of security.

Unfortunately, the project did not go as planned. We introduced quite a few changes to the service project. Then it turned out that the fixed price model has several disadvantages because:

• Changes in the project significantly increase the price – it is unknown how much we will pay until the end.
• Unexpected technical problems prolong the project's completion time beyond measure.
• The fixed price model is not flexible.
• There are no tools to control the project implementation, as the settlement does not include, among others, the cost of man-hours but the entire project.

Pros and cons of time and material: an example

Now let's put ourselves in the position of a company management needing to digitize hundreds of documents and transfer them and data from servers and workstations to the public cloud.

We decide to sign a contract with an IT company using the time & material settlement because:

• We need great flexibility since the project is complex. It is not precisely known how long it will take to organize and transfer data from dozens of computers and several servers to the public cloud; we opt for an hourly rate with a monthly hour limit and payment based on work reports.
• We care about the solidity of the final result; the budget is secondary to the correct implementation of the project.
• We want to outsource a comprehensive service; we do not have time to deal with additional resources, such as developing a new security policy in the company.
• We receive the completed service segment periodically as much as possible.
   

However, this payment type has several disadvantages, mainly:

• We do not know the final price for the service, although we have set a financial threshold.
• There needs to be great trust in the contractor, a feeling that they are reliable and not cheating on the number of hours.

Which payment model do we use at Hawatel?

At Hawatel, we use both payment models, although we generally work with an upfront project estimate, i.e., the fixed price model. Our portfolio also includes successful projects that we have implemented based on time and material estimates. We arrive at the choice of payment model through consultation with the client, aiming for the most optimal form of cooperation.

If you want to learn more, contact us!

Check out our previous article. We wrote about how IT infrastructure performance affects sales in an online store.