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The Hidden Costs of Inventing: Fixed-Fee vs. Time-and-Materials

the cost of inventing

In the world of product development, inventors looking to keep costs controlled are leaning more and more towards outsourcing engineering services to a product development company. As with any client/vendor relationship, the financial arrangement between the two companies can cause the most friction. When deciding what arrangement works best for both parties, most often the choices can be broken down into two categories: fixed-fee and time-and-materials. Both involve an agreement centered on a predefined scope, but the difference is that in fixed-fee the amount agreed upon is preset, while in a time-and-materials setting the company is paid for hours worked. Let’s break it down further:

 

Pros and Cons of a Fixed-Fee Arrangement

One of the greatest advantages, to an inventor, in a fixed-fee arrangement, is transparency of cost. You are less likely to get “sticker shock” at the end of the project and can budget accordingly. This type of arrangement forces the product development company to work as efficiently as possible and focus on the end game. If the product development company completes the scope of work on time, then the agreed price is paid, but if they run over time, they are still contractually obligated to complete the work, while simultaneously eating any additional cost. In order for the company to stay in the black with fixed-fee projects, they must focus on quoting small, manageable scopes of work that ultimately mitigate risk and can be performed on time. Where the company can run into trouble is when they don’t adequately define the scope parameters to the inventor, as anything outside the scope is an extra cost. To that end, both parties need to ensure that the deliverables and quality expectations are clearly outlined at the start of the project.

 

Pros and Cons of a Time-and-Materials Arrangement

On the flip side, with time-and-materials the advantage lies in the dynamic control the inventor has over the product development company's work.  The vendor in turn is incentivized to keep up-selling the product to lengthen the scope. The flexibility of time and material however, does have a downside: without a clearly defined scope, it can be very easy for a project to go off track leaving the inventor with a large bill and little to show for it. The key to success in this type of agreement is a clear understanding, by both parties, of what the required tasks are and how long they should take to complete.

 

Traits that make an organization's project more suited for a fixed-fee arrangement include:
  • Ability to sign off on large milestone payments without getting bogged down in red tape
  • Time driven results
  • An business approach based on trust and experience, where open communication is valued
  • Trust in the company's product development process to achieve the best results

 

Traits that make an organization's project more suited for time-and-materials arrangement:
  • Require freedom to change the scope at will, regardless of the cost
  • Unable to define the next scope without previous results
  • Preference for managing all aspects of product development
  • Desire to make decisions based on large data samples
  • More comfortable with incremental payments instead of one large lump sum
  • Need a wide array of choices and an overall consensus before making a decision

 

There are many factors that go into choosing which payment arrangement is right for your company; a harrowing endeavor for new inventors. As we outlined above, there are advantages to both agreements and deciding which would best fit your organization can be difficult. In conclusion, inventors need to take into consideration their business philosophy, product design history, and the structure of their organization before choosing which payment method is best for them.