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Fixed Costs vs Per Hour Contracts - Pros and Cons

Fixed Costs vs Per Hour Contracts: The Pros and Cons

As new pricing models are becoming evident in the market, it is crucial for entrepreneurs to decide on the model best fits the organization. For every project that an organization handles, during the planning phase, pricing is always the primary concern and it mostly depended on the amount paid to the team.  Also, the pricing model impacts the overall revenue of the organization. Typically, it is between a fixed rate or hourly rate that the organization must decide on.

On the other hand, it is also on the professional to decide on the model he or she wants to work with. He may want to work on a fixed-cost project or an hourly-priced basis. The difference between the two is the way he bills the client. He may set a fixed price for the job done or may set the amount for each hour of work. There are several pros and cons for both the aspects of pricing model.

In this article, we will discuss what the terms fixed costs and per hour contracts mean, and the different advantages and disadvantages of fixed price and per hour contracts.

 

What is a fixed-cost project?

As the name suggests, the fixed-priced model comes with a fixed budget estimation for a particular project with little or no scope alteration in the job and as well as cost. The cost and timeline of the project are decided upon in advance by both parties, employers, and employees.

Typically, this type of pricing model is applied for small projects where the task is limited and the number of employees required is also less. Also, once the terms and conditions of such projects are agreed upon, usually, no changes are accepted.

 

Pros and cons of fixed-cost projects

Pros

Less botheration: The hassle reduces for both the workers and management when the costs are fixed. There is no need to regularly track the productivity of the team involved. Just regular communication and reports would be enough to keep the track of the project’s progress.

Clear set goal: Such projects usually have a well-defined objective which is explained at the beginning of the project. Of course, queries and concerns follow, but usually, once the objective is defined there is less to no alteration of the project attributes.

No frequent payments: The payments are usually done at the end of the project. There is neither any hassle of paying the team now and then, nor there is any concern from the workers about reminding the client about the due payment. Once the project is complete and approved the entire payment is done.

 

Cons

Rigidity: Usually, no project can be termed ‘fixed’ or ‘complete’. Modifications at different stages of a project are part and parcel of the development process. When the project has a defined set of attributes, the absence of fluidity in it might result in larger costs when modifications are demanded after its completion. For a fixed project, when modifications are demanded, one has to re-analyze every aspect of it, from the timeline and cost to priorities. It is time-consuming and demands more expenses.

Risk of slow progress: The team might feel that there is enough to complete the project and delay the progress. As this could hamper productivity, there is less quality control.

 

What is a per-hour contract?

It is a common practice for many professions to charge and be paid by the hour. Under this model, the workers are paid on the basis of how many hours they have worked for the concerned project. It is usually pre-decided that how many hours the requirement of the project is.

It is believed that this model encourages the team to value their time and urges them to perform better. There are tracking apps that help managers to track hourly performance and accelerate the productivity of the team accordingly.

 

Pros and cons of per-hour contract

Pros

Expected accuracy: When a team is working on an hourly basis, it is expected that there will be more accuracy compared to fixed costs projects. Typically, a tracker is placed to track the performance of the team and thus each professional in the team thrives to perform better with hourly payments.

No issue with extra hours: Extra hours in an hourly contract is a sign that the team is more productive than expected. With a tracker installed, everything is transparent and extra hours do not raise a question.

No concern for delayed payments: Since the payment is done exactly for the hours paid, there is no question of delayed payments. The employer may decide on a particular date or it always is asked by the concerned team.

The project can be altered at any stage: For an hourly contract the project may be halted at any point in time and altered according to the progress and demand.

 

Cons

Risk of errors: For hourly projects, the chances of errors increase as there is pressure to complete a given task of the project within an estimated number of hours.

Unpredictable project costs: Since the cost of the project is not fixed and the work may exceed its estimated work hours, the unpredictable costs behind the project may pose to be an issue. The costs may increase along with the development of the project or even may decrease when there is a removal of unnecessary features.

 

Conclusion

As there are two sides to everything in this world, similarly fixed and hourly projects both have their own sets of advantages and disadvantages as well. You can be either the employer looking for professionals to complete your projects or a professional working on your terms. In both ways, it is essential to know which one suits you, fixed costs or hourly contracts.

While a simple project without much complexity and a tight budget call for a fixed pricing model, a complicated project with no definite completion idea might go well with an hourly payment model.

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