There are two popular types of settlement on the Internet services market – fixed price and time and material. While in Poland, fixed price settlements for IT or e-commerce projects continue to prevail, time and material settlements, which are commonly used by eCommerce agency in projects of various sizes, have long been accepted abroad. More and more companies in Poland are beginning to use and introduce time/material settlement, so it is necessary to discuss this topic and present what is the difference between both types of settlement, where they come from and what are their pros and cons. At the end of the article I will present our opinion on which type of settlement we use in the ecommerce agency and why. At the beginning let’s focus on the definition of both types of settlements – what they really are?
What exactly are fixed price and time&material settlements?
Fixed price means the price which can’t be changed. In this type of settlement we set the price for the implementation of an online store or other project and we enter this price into the contract, paying it at the end of implementation or dividing it into smaller parts. Settlment of this type can be very restrictive because we cannot exceed the price for the project stated in the agreement. Often, a specification is created for this type of contract, which we stick to when creating a given IT project with an ecommerce agency.
Time and material settlement means payment for working hours (time) of developers and “material” (project supervision, consulting, tests, additional things which must be bought e.g. modules, graphics etc.).This settlement is common while working in the so called agile project management framework (e.g. SCRUM Agile). In this type of settlement we pay for the number of hours worked on our project, in the contract we have established the terms of payment and reporting on the progress of work, with the possibility of expanding and changing its elements, because we do not have a fixed scope of the project. For projects sometimes specifications are made in order to know the approximate cost and time frame needed for its implementation. The final cost of the project may be less or greater than the one assumed at the beginning of the implementation, due to changes made during its creation.
Advantages of both types of settlements
Both settlements have advantages. Fixed price settlement guarantees us fixed price for the scope of project. Thanks to this we know what we will pay for before we start working on the project and we also know how much budget we will fit in at the end. This type of settlement also allows you to easily compare offers if you are looking for a different ecommerce agency among your competitors. Projects in this model are easier to report and it may also seem that they are easier to control (about that later).
In the time and material settlement we have the option to modify the scope of the e-commerce project during its course, if suddenly a trend appears on the market that we want to adapt to. We can monitor expenses on an ongoing basis and plan work, dividing them into 2- or 4-week stages that create functional, working elements of the store, which we immediately test after completion and can run on a working store.
Disadvantages of both types of settlements
Fixed price settlement has also disadvantages. Often, companies that settle accounts in such a way hand over the project only after its completion, so we can’t verify what happens along the way during its creation. You should also be careful if you haven’t specified the scope of the project and have not developed specifications before signing the contract. In our mind, the project may differ from what our IT company thinks, which may cause big discrepancies in the work and end up with many corrections and a bitter aftertaste when the implementation of our online store begins to extend endlessly.
Additionaly we cannot change the scope of project during its implementation, because it ruins contractual agreement and destroys the whole carefully prepared schedule. It is common to give new suggestions to our IT company during the project, expecting these suggestions to be added to the project and implemented. Remember, however, that the scope of the project has already been closed in the contract and cannot be changed. In some cases, if we want to significantly change the scope of the project, the IT company may terminate the contract with us or may not complete the project if the work is prolonged and work on the project becomes unprofitable. Sometimes companies renegotiate contracts or sign additional annexes, which prolongs the work and forces additional payment for the project.
Time/material settlment also has its downsites. The main one is the fear that the IT company will deceive us and charge us too many hours for a given task or the entire project. Such fear can be a bit irrational, because if we don’t trust our company, who can we trust? Do you trust your bakery that there is flour in the bread and not powdered chalk? Additionally, we must take into account that companies that apply this settlement do it fairly if they have been operating in this model for a long time. If they were dishonest, their clients would quickly verify it, and a company with a bad reputation would quickly collapse. One of the principles of both types of settlement is that the fixed price settlement serves to protect both parties in terms of the scope of the project and the budget, and the time/material settlement is based on the principles of trust and joint work on project development. In both types of settlements, there are ways to ensure that the IT company properly accounts for our project, which we will address in the following paragraphs.
Why don’t companies fit into their estimates and planned settlement amounts?
Since both types of settlments may involve higher fees for the project, it is necessary to consider why e-commerce companies do not fit into their original estimates. Whenever we talk to an e-commerce company with proven experience, we are dealing with professionals. Therefore, we expect their estimates to be correct and true. However, we don’t take a few things into account.
With smaller functions, the price estimates may coincide 100% with the time that actually takes their execution. But no expert has all the code in his head and all the links that exist in the e-commerce engine, especially if many functions of our store are dedicated to our company. Therefore, there are discrepancies in the estimates and the actual time worked on the project. Additionally, while working on the project, certain unforeseen events may occur, e.g. unannounced module updates that turn upside down certain functions in our store, or changes in information sent e.g. by our ERP platforms, which have already been integrated according to the old rules. The last element that affects time differences are frequent changes in the assumptions of individual functions, reported while working on them, which prolongs the time of their implementation and increases the initial assumed costs. Since we are not able to predict all modifications and changes that will occur, time estimates often have to be verified on an ongoing basis during the work.
How to ensure settlements with an ecommerce agency
If we want to ensure peace of mind when working in a fixed price mode, it is very important to develop a project specification that describes each task and scope of each function on our store or B2B platform. This allows us to ensure the shape of our store according to the agreement, and by keeping to the scope of the project we do not expose ourselves to additional costs. The specification will help the IT company to determine the cost of such a project, because it will describe every aspect of it very accurately. Often the specification has to be paid for additionally, because creating such a document can take from 2 to 4 weeks and takes several dozen working hours of project management experts, implementers and programmers. Some companies also include the cost of the specification in their programming work, offering such specification for free. All extensions or changes on the store will have to be done on the basis of appendixes to agreements, because the scope of the project with the specification will not be able to change.
And what about working in a time/material mode? And how can we make sure that the IT company accounts for us fairly? First of all, let’s consider how such a company will account for its employees. In some companies employees are employed on a so-called contract and are paid for the number of hours they work in a given month. It is in their interest to work out the maximum number of hours for which they will be paid, and the IT company presents the same hours to its customers by invoicing them for the work of its experts. If the experts do not do their job, they will not get paid and the company will quickly show whether they are working for free or accounting fairly.
If we create a preliminary specification for the time / material model, it may help in controlling the cost – the specification will show us the initial scope of the project and its price, which may change, but we will have an assumed framework that we can verify on an ongoing basis. Besides, if we want to make additional changes, we can apply the principle of “remove and replace” – getting rid of an unnecessary element and replacing it with a new function with the same hourly weight. We should also receive a report on the tasks and hours worked from our project manager every 1-2 weeks.
In addition, we should have access to the project management system (PMS), where we will see the percentage progress and how many hours have been used for given tasks. Another way is to calculate the number of hours for each programmer, tester and project manager – we can add the number of hours on development, multiply by the time needed for testing and consulting / project management and we will see if the number of hours does not exceed the real time frame. The last way is to verify the method of settling accounts with the company’s current clients – ask them to contact the clients with whom such a settlement model was used and talk with them about their experience with the company that settles such accounts. Such contact will quickly verify how our Magento agency settles projects in this model.
How our ecommerce agency accounts for our customers in projects
Normally in our projects we choose time/material settlement. Why? We believe that this is a very good type of settlement in e-commerce projects for both us and our customers. Customers can supervise their expenses on an ongoing basis and can change the scope of the project during its duration – which will certainly happen, because expectations change during 3 months of work on the project, not to mention projects that last longer. Additionally, a client in this model receives every 2 or 4 weeks a working functionality, which he can test and add to his store, thanks to which the launch of the store can take place even faster than planned, and the store can earn for itself even before the project is completed.
Fo us, as an ecommerce agency specialising in Magennto, this type of settlement reflects our work fairly. We get paid for the Dla nas jako agencji Magento ten typ rozliczenia daje sprawiedliwe odzwierciedlenie naszej pracy. We are paid for the number of hours worked, so it is in our interest to use our time as efficiently as possible. Additionally, we give hourly reports to our clients and often inform them about the scope of the project, especially if the time frame we set is exceeded – we will never go further with the work without our client’s prior consent. Thanks to this type of settlement we can also react to changes in technology or modules that are not foreseen (e.g. a sudden change in the payment gate API). As an ecommerce agency we guarantee to pay for changes that cannot be foreseen earlier. Working in a fixed price settlement, IT companies are often “condemned” to bear the costs of a given change, even if it is not dependent on them.
Both types of settlements give us some advantages and disadvantages, if we choose them. The choice of a settlement with an ecommerce agency ultimately depends on the client and the company they work with. Times sure change and the time / material settlements come into circulation more and more often, so they will be more and more often encountered when working with Magento agencies. If we are concerned about our budget, a very precise project specification and fixed price settlement should be the right choice. If we value good quality of service and fair payment for work with the possibility of changing and modifying the project according to our own expectations, then the time / material settlement is the one we should choose. Some companies have only one type of settlement selected, and this is the type of settlement we will have to choose when working with them, so don’t be surprised if the company only settles on a time / material basis. All IT trends migrate to us from the West and modern working methodologies, so the settlement trend goes in the direction of hourly settlements and it seems to us that soon all IT companies, or at least those who want to survive in a dynamically changing environment, will choose this type of settlement permanently.
Write to us if you want to find out more about time and material settlement.