Milestone Billing vs Time and Materials (T&M) vs Fixed Price Billing for Product Development Projects

Learning Centre > Milestone Billing vs Time and Materials (T&M) vs Fixed Price Billing for Product Development Projects

In this article, we'll compare Milestone Billing with Time and Materials Billing and Fixed Price Billing to help you decide which is right for your next project.

In this article, we'll compare Milestone Billing with Time and Materials Billing and Fixed Price Billing to help you decide which is right for your next project.In this article, we'll compare Milestone Billing with Time and Materials Billing and Fixed Price Billing to help you decide which is right for your next project.
Contents

How do you charge for outsourced product development projects? It's a question that every business owner will have to ask at some point.  In this article, we'll compare Milestone Billing with Time and Materials Billing and Fixed Price Billing to help you decide which is right for your next project.

Let's explain what each invoicing method is. First up is Milestone Billing:


What is Milestone Billing?

Milestones are key points in a project where the client can assess the contractor's progress and determine whether the project is on track. They are usually defined in the contract between the client and Innovolo. Common examples of milestones are completion of a prototype, submission of a completed project, or launch of a finished product.

The client usually pays for these milestones as they are reached. This type of billing is called milestone billing. It is a common billing method for product development projects.

We'll look at the advantages and disadvantages of milestone billing later in this article, but for now, let's look at Time and Materials Billing:


What is Time and Materials (T&M) billing?

Time and materials billing is a billing method where the client pays for Innovolo's time, and the cost of the materials used. The client usually pays for these items as they are incurred. This type of billing is often used for projects where the scope is not well defined or is likely to change.

Time and materials billing can typically be further broken down into three types:


Pay-as-You-Go Billing

This is where the client pays for work as it is completed.

In Pay-as-You-Go (PAYG) time and materials billing, Innovolo would send an invoice to the client before each job or task, typically payable within 14 days. This type of billing is often used for projects where the scope is not well defined or is likely to change. PAYG billing can typically be further broken down into three types:


Task-based PAYG Billing

Task-based PAYG billing is where the client is charged for each task that is completed. For example, if Innovolo is creating a technical manual, the client may be charged for each task, such as writing the manual, editing the manual, and printing the manual.

The pricing is based on the complexity of the task, the time it will take to complete, and will include any materials that will be used.

Payment for these invoices would typically be due within 14 days.


Time-based PAYG Billing

Purely time-based billing is where the client is charged for the time that the contractor spends working on the project. For example, if Innovolo charges £150 per hour and spends 10 hours working on the project, the client will be charged £1,500.

This type of PAYG billing is not offered by Innovolo at this time.


Material-based PAYG Billing

Material-based billing is where the client is charged for the materials used on the project, typically on a cost-plus basis. For example, if Innovolo uses £500 of materials on the project, the client will be charged £500 plus a mark-up of 50% to cover Innovolo's costs, giving a total bill of £750.

Materials would typically be invoiced to the client at the end of each month, and the client would be liable for payment within 14 days.



Hybrid Retained Hourly Billing

This is where the client has an ongoing need for ad-hoc product development tasks, and so retains Innovolo on an agreement to provide these tasks as and when needed. An agreed set number of hours per month are included in the contract (e.g., 20 hours), and any additional hours are charged at an agreed hourly rate (e.g., £150 per hour).

There would be a set minimum term for this type of contract, typically 3-12 months.

In this type of billing, Innovolo would raise an invoice for the contracted hours at the beginning of each month, and the client would be liable for payment within 14 days. Additional hours would be invoiced at the end of each month and would also be payable within 14 days.

For example, if the client has a contract for 20 hours per month at £150 per hour, Innovolo would raise an invoice for £3,000 at the beginning of each month. If during that month Innovolo spends 30 hours on the project, an additional invoice for 10 hours at £150 per hour would be raised at the end of the month, giving a total amount payable for that month of £4,500.

OK, so that's a quick overview of Time and Materials Billing. Now let's look at the last type of billing, which is Fixed Price or Project-Based Billing:


What is Fixed Price Billing?

Fixed price billing (also referred to as Project-Based Billing) is a billing method where the client pays a set price for the entire project. This type of billing is often used for projects where the scope is well defined and is not likely to change.

Innovolo doesn't offer fixed price project billing because it's hard to predict how much a project will cost. This is because innovation and research projects are never 100% certain and can change a lot.

Not providing fixed prices protects both the client and us. It would be unfair to charge the client a set price and then must ask for more money if the project scope changes. Likewise, it would be unfair to charge the client a set price and then not deliver the project on time or to the required specification.

For example, if Innovolo agreed with the client to deliver a project for £50,000, and then during the project it became apparent that additional work was needed which would take an extra 40 hours to complete in project management time, this would cost an additional £6,000 at our standard rate of £150 per hour. This is at Innovolo's risk, not the clients, as we did not provide a fixed price for the project.

If we look at another example, let us say that the contract sum was £50,000 for the entire project, but we only managed to complete the work in 70% of the time allocated, then the client is still liable for the full amount. This is because we have still provided the agreed deliverables, even though it has taken less time than we thought.

Product development companies offering clients fixed price billing will be overestimating the effort and cost involved to protect themselves, which means the client will be overpaying.

In conclusion, Fixed Price billing is something that Innovolo does not offer as it's just too risky for both parties. If you're looking for certainty in pricing, then this is not the right type of billing for you.


OK, so now let's do a bit of a deep dive into the advantages and disadvantages of each type:


Advantages and Disadvantages of Milestone Billing

Advantages of milestone billing type from a client’s perspective:

Disadvantages of milestone billing from a client’s perspective:

Advantages of milestone billing from Innovolo's perspective:

Disadvantages of milestone billing from Innovolo's perspective:


Advantages and Disadvantages of Time and Materials (T&M) billing

Advantages of Time and Materials billing from a client’s perspective:

Disadvantages of Time and Materials billing from a client’s perspective:

Advantages of Time and Materials billing from Innovolo's perspective:

Disadvantages of Time and Materials billing from Innovolo's perspective:


Advantages and Disadvantages of Fixed Price billing

Advantages of Fixed Price billing from a client’s perspective:

Disadvantages of Fixed Price billing from a client’s perspective:

Advantages of Fixed Price billing from Innovolo's perspective:

Disadvantages of Fixed Price billing from Innovolo's perspective:


Conclusion

So, what's the best way to bill for product development services? In our experience, time and materials billing is the best option for both clients and service providers. This type of billing gives the client more transparency and control over costs, while still allowing the service provider to predict their costs and budget for the project.

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How do you charge for outsourced product development projects? It's a question that every business owner will have to ask at some point.  In this article, we'll compare Milestone Billing with Time and Materials Billing and Fixed Price Billing to help you decide which is right for your next project.

Let's explain what each invoicing method is. First up is Milestone Billing:


What is Milestone Billing?

Milestones are key points in a project where the client can assess the contractor's progress and determine whether the project is on track. They are usually defined in the contract between the client and Innovolo. Common examples of milestones are completion of a prototype, submission of a completed project, or launch of a finished product.

The client usually pays for these milestones as they are reached. This type of billing is called milestone billing. It is a common billing method for product development projects.

We'll look at the advantages and disadvantages of milestone billing later in this article, but for now, let's look at Time and Materials Billing:


What is Time and Materials (T&M) billing?

Time and materials billing is a billing method where the client pays for Innovolo's time, and the cost of the materials used. The client usually pays for these items as they are incurred. This type of billing is often used for projects where the scope is not well defined or is likely to change.

Time and materials billing can typically be further broken down into three types:

  • Pay-as-You-Go Billing
  • Pre-payment or Advance Billing
  • Hybrid Retained Hourly Billing


Pay-as-You-Go Billing

This is where the client pays for work as it is completed.

In Pay-as-You-Go (PAYG) time and materials billing, Innovolo would send an invoice to the client before each job or task, typically payable within 14 days. This type of billing is often used for projects where the scope is not well defined or is likely to change. PAYG billing can typically be further broken down into three types:

  • Task-based billing
  • Time-based billing
  • Material-based billing


Task-based PAYG Billing

Task-based PAYG billing is where the client is charged for each task that is completed. For example, if Innovolo is creating a technical manual, the client may be charged for each task, such as writing the manual, editing the manual, and printing the manual.

The pricing is based on the complexity of the task, the time it will take to complete, and will include any materials that will be used.

Payment for these invoices would typically be due within 14 days.


Time-based PAYG Billing

Purely time-based billing is where the client is charged for the time that the contractor spends working on the project. For example, if Innovolo charges £150 per hour and spends 10 hours working on the project, the client will be charged £1,500.

This type of PAYG billing is not offered by Innovolo at this time.


Material-based PAYG Billing

Material-based billing is where the client is charged for the materials used on the project, typically on a cost-plus basis. For example, if Innovolo uses £500 of materials on the project, the client will be charged £500 plus a mark-up of 50% to cover Innovolo's costs, giving a total bill of £750.

Materials would typically be invoiced to the client at the end of each month, and the client would be liable for payment within 14 days.



Hybrid Retained Hourly Billing

This is where the client has an ongoing need for ad-hoc product development tasks, and so retains Innovolo on an agreement to provide these tasks as and when needed. An agreed set number of hours per month are included in the contract (e.g., 20 hours), and any additional hours are charged at an agreed hourly rate (e.g., £150 per hour).

There would be a set minimum term for this type of contract, typically 3-12 months.

In this type of billing, Innovolo would raise an invoice for the contracted hours at the beginning of each month, and the client would be liable for payment within 14 days. Additional hours would be invoiced at the end of each month and would also be payable within 14 days.

For example, if the client has a contract for 20 hours per month at £150 per hour, Innovolo would raise an invoice for £3,000 at the beginning of each month. If during that month Innovolo spends 30 hours on the project, an additional invoice for 10 hours at £150 per hour would be raised at the end of the month, giving a total amount payable for that month of £4,500.

OK, so that's a quick overview of Time and Materials Billing. Now let's look at the last type of billing, which is Fixed Price or Project-Based Billing:


What is Fixed Price Billing?

Fixed price billing (also referred to as Project-Based Billing) is a billing method where the client pays a set price for the entire project. This type of billing is often used for projects where the scope is well defined and is not likely to change.

Innovolo doesn't offer fixed price project billing because it's hard to predict how much a project will cost. This is because innovation and research projects are never 100% certain and can change a lot.

Not providing fixed prices protects both the client and us. It would be unfair to charge the client a set price and then must ask for more money if the project scope changes. Likewise, it would be unfair to charge the client a set price and then not deliver the project on time or to the required specification.

For example, if Innovolo agreed with the client to deliver a project for £50,000, and then during the project it became apparent that additional work was needed which would take an extra 40 hours to complete in project management time, this would cost an additional £6,000 at our standard rate of £150 per hour. This is at Innovolo's risk, not the clients, as we did not provide a fixed price for the project.

If we look at another example, let us say that the contract sum was £50,000 for the entire project, but we only managed to complete the work in 70% of the time allocated, then the client is still liable for the full amount. This is because we have still provided the agreed deliverables, even though it has taken less time than we thought.

Product development companies offering clients fixed price billing will be overestimating the effort and cost involved to protect themselves, which means the client will be overpaying.

In conclusion, Fixed Price billing is something that Innovolo does not offer as it's just too risky for both parties. If you're looking for certainty in pricing, then this is not the right type of billing for you.


OK, so now let's do a bit of a deep dive into the advantages and disadvantages of each type:


Advantages and Disadvantages of Milestone Billing

Advantages of milestone billing type from a client’s perspective:

  • The client knows exactly how much they will be paying for each stage of the project.
  • The client can budget for each stage of the project in advance.
  • If the project is delayed, the client only pays for the work that has been completed.
  • One flat fee, no surprises, or hidden costs
  • More accurate billing
  • Flexibility to increase or decrease work as needed without incremental charges

Disadvantages of milestone billing from a client’s perspective:

  • The client must trust that Innovolo will accurately estimate the amount of work required for each stage of the project.
  • If the project is delayed, the client may have to wait longer for the final product, for no additional cost.
  • If Innovolo delivers the milestones faster than expected, then the client will potentially be paying more than they budgeted in a given month.

Advantages of milestone billing from Innovolo's perspective:

  • If the project is delayed, Innovolo can still bill for the project milestones that have been completed.
  • Innovolo can budget for each stage of the project (i.e., each project milestone) in advance.

Disadvantages of milestone billing from Innovolo's perspective:

  • The client may not be happy if the final product is delayed.
  • The onus is on Innovolo to very accurately estimate the amount of work required for each stage of the project.
  • If the project milestones are delayed, Innovolo may have to wait longer for the final payment.


Advantages and Disadvantages of Time and Materials (T&M) billing

Advantages of Time and Materials billing from a client’s perspective:

  • The client only pays for the work that has been completed.
  • The client can budget for the project in advance.
  • More accurate billing: the client only pays for the work that has been completed.
  • Flexibility to increase or decrease work as needed without incremental charges.
  • A greater level of transparency for the client as they can see how much work has been done.
  • No surprises or hidden costs, allowing the client a lot more accurate budgeting.

Disadvantages of Time and Materials billing from a client’s perspective:

  • If the project is delayed, Innovolo can still bill for the work that has been completed.

Advantages of Time and Materials billing from Innovolo's perspective:

  • Innovolo can bill for all the work delivered, whether completed or not.
  • The greater ability to control costs.

Disadvantages of Time and Materials billing from Innovolo's perspective:

  • The project may overrun in terms of cost and time, more than the client is willing to pay.


Advantages and Disadvantages of Fixed Price billing

Advantages of Fixed Price billing from a client’s perspective:

  • The client knows exactly how much they will be paying for the project.
  • The client can budget for the project in advance.
  • One flat fee, no surprises, or hidden costs even if there are some minor changes during the project.

Disadvantages of Fixed Price billing from a client’s perspective:

  • If the project is delayed, the client may have to wait longer for the final product, for no additional cost.
  • If Innovolo underestimates the amount of work required, they may not be able to cover their costs, which could result in a poor-quality product.
  • If Innovolo overestimates the amount of work required, the client will be overpaying.
  • ~90% of new product development project experience a change in scope during that project. Fixed price billing allows for no room for scope change.

Advantages of Fixed Price billing from Innovolo's perspective:

  • Innovolo can more easily predict their costs and budget for the project.
  • Innovolo is less likely to lose money on a project if they overestimate the amount of work required.

Disadvantages of Fixed Price billing from Innovolo's perspective:

  • Innovolo bears all the risk if the project is delayed or requires more work than anticipated.
  • Innovolo may have to compromise on quality to stay within the budget.


Conclusion

So, what's the best way to bill for product development services? In our experience, time and materials billing is the best option for both clients and service providers. This type of billing gives the client more transparency and control over costs, while still allowing the service provider to predict their costs and budget for the project.

Key Takeways

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Farm+Stable is a client of Innovolo, a product development as a service provider offering R&D teams globally extra capacity, capability, and momentum in their product development and obsolescence management projects. As a company that specializes in the development and engineering of products for the agriculture and construction industries, Farm+Stable has benefited from Innovolo's expertise in helping to bring new products to market quickly and efficiently. In particular, Farm+Stable has been able to rely on Innovolo's team of experienced engineers to help with the design and development of a new line of products that are designed to be more durable and longer-lasting than previous models. With Innovolo's help, Farm+Stable has been able to bring these new products to market in a timely manner, and they have been well-received by customers. Thanks to Innovolo's innovative product development solutions, Farm+Stable has been able to stay ahead of the competition and continue to grow their business.
Innovolo is a product development as a service provider. It offers R&D teams globally extra capacity, capability, and momentum in their product development and obsolescence management projects. Its services are used by clients in a variety of industries, including automotive, aerospace, consumer electronics, and medical devices. One of its clients is Kawneer, a leading manufacturer of aluminum products for the architectural and construction industries. Kawneer has been using Innovolo's services to help develop new products and to manage the obsolescence of its existing products. Thanks to Innovolo, Kawneer has been able to speed up its product development cycle and to reduce its costs. As a result, Kawneer has been able to bring new products to market faster and to better meet the needs of its customers.

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