Fixed outsourced IT contracts vs Time and materials - Which is preferred?

Are fixed price contracts better than "time and materials"?

Fixed and time-and-materials outsourcing IT contracts have advantages and disadvantages, and the choice depends on the specific needs, objectives, and risks associated with your startup and project.

Fixed contracts (or fixed-price contracts) involve a predetermined price for the agreed-upon scope of work.

This type of contract can be beneficial in the following situations:

1. When the project scope and requirements are clearly defined and unlikely to change.
2. When there is a need for budget certainty, the startup will know the exact cost upfront.
3. When the project timeline is well-established and inflexible.
4. When the risk of project cost overruns should be shifted to the service provider.

However, fixed contracts can have downsides, such as limited flexibility for changes in scope, the potential for lower quality work due to cost-cutting measures by the provider, and the possibility of disputes over additional charges for scope changes.

Time-and-materials contracts involve payment based on the actual hours worked and materials used, which can be more flexible and better suited for the following situations:

• When the project scope is uncertain or likely to evolve.
• When there is a need for greater collaboration between the startup and the service provider.
• When the startup wants to control the project's direction and progress more.
• When estimating the project's duration or complexity accurately is difficult.

However, time-and-materials contracts may have downsides, such as a lack of budget certainty, the potential for cost overruns, and a higher level of financial risk for the startup.

Ultimately, the choice between fixed and time-and-materials depends on your startup's specific needs and risk tolerance.

Consider factors such as the project scope, budget certainty, level of control, and flexibility to determine the best type of contract for your situation.

We believe the inexperienced non-tech Founder should lean more towards a fixed contract.

Also, ensure you are not paying a pseudo management fee, that is, not paying higher prices for subcontracted overseas workers.

You need to know who has been involved in the project, their hourly rate, and what code (and when) they have committed to Github or similar source control repositories.

<font color="purple>Consider this phrase: "If no source code has been committed" = "there has been no actual work done"

So be careful what you are being asked to pay for. It would also help to remember overseas IT workers are not allowed to be included in R and D incentive costings.

It's also possible to use a hybrid approach to balance cost certainty and flexibility, combining elements of fixed and time-and-materials contracts.