Time and materials vs. fixed bid is the classic duo of billing models in software services business. Time and materials puts all the pressure on the client to make sure the work is completed. They must have enough control and transparency to be satisfied the work is moving at the right pace and in the right direction. Fixed bid projects put all the pressure on the services company to make their estimates for the whole project correct up front. Since software is a craft with a close problem finding to problem solving loop, we can never anticipate what lies beneath a given problem set, making fix bid a high risk.
8th Light uses a compensation model we call fixed feature which finds a middle ground between hourly and fixed bid compensation. Fixed Feature is an Agile method of fixed bid compensation that is unique in that clients only pay for the product they receive. At the beginning of an iteration we estimate using the PERT estimating technique. After estimating we make a commitment to those estimates and use a predetermined price per point to calculate the cost. At the end of the iteration we bill for the features that are accepted by the customer.
Because of this, clients do not have any obligation to manage personnel or hours, they get to focus on software features. Clients also know from the start exactly how much each feature will cost, regardless of the labor that goes into making it. The metrics collected can be very important to the client specifics about where the cost of overall software is actually going. From there they can iterate and effectively choose what features are most important to their business.
This payment models didn't come without pain. It made it transparent that our estimates were not very accurate. We had to learn how to be really good at estimating features, which is described in the white paper From Estimate To Commitment.