How to make Time&Materials billing more financially secure?
In this post, I will present 8 ways to make billing with an ecommerce agency in the Time&Materials model more predictable.
What can be done to make Time & Materials billing more financially secure?
Time & Materials billing Model
Disadvantages of the Time & Materials Model
8 ways to increase financial predictability in the Time & Materials model
Summary
I’ve prepared 8 points that you can use to increase the predictability of costs for the implementation of an online store or B2B ecommerce.
The first point involves obtaining a guarantee from the ecommerce agency not to exceed the maximum number of hours. This is quite a bold idea, which I will return to later.
The second idea is to accurately describe the scope of implementation work during the discovery phase.
The third point is to obtain a guarantee that your project will be worked on by an experienced team whose competencies you can check, for example, via LinkedIn.
The next point is to require the ecommerce agency to report precisely on the project’s progress and hours worked so that you can track the stage of the project and what percentage of the budget has been used.
Another point is to reduce the scope of implementation and simplify as well as reduce the number of atypical integrations.
Another aspect is to receive and check the next stages of the implementation of the online store or B2B ecommerce every two weeks.
The last point is to choose the technology used by many ecommerce agencies or software houses.
Time & Materials is a billing model in which you pay for the actual hours worked by the ecommerce agency.
For instance, the ecommerce agency estimated the implementation of your online store to take about 400 to 600 hours. The coding of the online store took 557 hours. As a result, you pay for 557 hours multiplied by the hourly rate you’ve agreed upon with the particular ecommerce agency. For example, 70 EUR/USD. In total, 557 x 70 EUR/USD = 38.990 EUR/USD.
If the implementation were to take longer, for example, 700 hours, you would pay for 700 hours because that’s how much work the agency did. So, in total, 700 x 70 EUR/USD = 49.000 EUR/USD.
💡 Find out which billing model should you choose for ecommerce implementation!
However, this model carries certain disadvantages. The most important of which is uncertainty regarding the project’s final cost.
Let’s assume that I am the director of ecommerce in a large company. I cannot go to the board and say that we are planning a large investment project, but I do not know whether it will cost 112.000 EUR/USD, 224.000 EUR/USD, or 560.000 EUR/USD.
The agency suggests the cost will be between 112.000 to 168.000 EUR/USD. Then, as the director of ecommerce, I might hear a question from the CFO about whether we should budget a maximum of 168.000 EUR/USD for this project in next year’s budget.
I am in a difficult situation because I don’t want to give an amount of 168.000 EUR/USD, knowing that we are working on a Time & Materials model. I am aware that the final cost might even reach 336.000 EUR/USD. One can imagine how difficult the conversation with the board will be if the project’s final cost exceeds the planned budget.
However, most medium and large ecommerce implementations are carried out by agencies precisely in the Time & Materials model. Finding good ecommerce agencies that conduct big and medium ecommerce implementations in the Fixed Fee model is difficult.
On one hand, I understand the Time & Materials model, but on the other hand, I must take into account the expectations of other people in the organization. I realize that conversations on this topic can be difficult.
It’s impossible to provide one figure that should be entered into the budget and used for billing later on. Although this may seem unfavorable, several solutions can increase the financial predictability of an online store implementation project, even if it is settled in the Time & Materials model.
Although quite bold, the first solution involves trying to talk to the ecommerce agency. The point is to suggest, during contract negotiations, including a guarantee that the amount will not exceed the estimated maximum implementation budget of the online store.
This solution benefits the client because if the implementation takes less time, the benefit is on their side. Additionally, the client receives a guarantee that the entire implementation will not exceed the specified budget, thus eliminating risk. In other words, they get the best of the Fixed Fee and Times & Materials models.
However, in practice, the ecommerce agency may read this as an attempt to introduce a fixed fee model but in a form that is only beneficial to the client (which is true). In such a situation, an experienced agency will say that either it does not carry out projects on a Fixed Fee basis or that if the billing model is to change, it will prepare a new estimate (here, one can expect a budget that is 100% higher than the maximum estimate from the Time & Materials model)
Then, this proposal may no longer seem so attractive. Nevertheless, it is worth being prepared for such a conversation if you would like to propose such a billing model. It is advantageous for the client but disadvantageous for the ecommerce agency, which can result in difficult negotiations.
Another solution is to accurately describe the scope of work. The results of the discovery phase, or pre-implementation analysis, should describe as well as possible what the online store or B2B ecommerce is to look and function like.
The more precisely the online store and its functions are described, the more precisely programmers can estimate the time needed to implement a given element. For example, if you only provide them with one sheet describing how the online store should work, you will likely receive an estimated implementation time with a wide range. The programmer will simply throw out a number, e.g., 200 to 900 hours. This is not helpful.
If, however, you describe each task in detail, break it down into additional points, and describe each of them precisely, programmers can estimate the time needed to accomplish each small task more accurately. As a result, the sum of the time needed to complete all the small points may be completely different (I mean greater) than the original estimation of a very briefly described scope.
A detailed description of the system’s operation allows for a more accurate estimation of implementation time, and consequently, the estimated costs are closer to reality. Considering financial security and predictability, it is worth investing in a well-conducted discovery phase.
Although such a pre-implementation analysis costs more, it provides greater financial predictability and likely a smaller budget for programming work.
The products of the discovery phase should include detailed user stories, acceptance criteria, described system architecture, project risks, updated estimates of budget, and graphic designs. This is the absolute minimum that we define as a well-conducted discovery phase.
Another element that provides greater security and predictability with the Time and Materials model is the guaranteed experienced team.
During negotiations with the ecommerce agency, ask for information and guarantee that if you decide within a certain time, your project will be worked on by a project team consisting of specific people.
You can check their experience on LinkedIn and see how many years they have been working within a given ecommerce engine. It is best to ask for a team where there are many mid and senior-level people.
This way, project estimates will be more accurate, and the subsequent task execution will be very close to those estimates. If the team will consist mainly of junior-level personnel, the implementation is unlikely to finish within the estimated time.
You can also ask for reporting that will show you what percentage of the budget spent was used to complete a given task or the entire project and what percentage of the project or a given task has already been completed.
By observing regularly, at least once every two weeks, it is possible to monitor any discrepancies. If you notice that the percentage of the budget used is growing quickly – for example, 80% of the budget is used up with only 30% of the user stories completed – this is a signal that something is not going according to plan.
In such a case, you should react as quickly as possible and discuss at a status meeting with the contractor, that is, with the ecommerce agency. Discuss where the discrepancies are coming from, how you can address this risk, and whether there is a possibility to catch up with the budget.
Consider where you might be able to reduce implementation costs later to fit within the originally planned budget.
One way to control the hours’ consumption is to reduce the scope of the online store or B2B ecommerce implementation.
The smaller the project, the less risk of unforeseen problems and the higher the probability that the actual implementation costs will be in line with the original estimation.
Even with excellent business analysis, larger implementations can be prone to error.
If you want to increase predictability in the Time & Materials model, consider reducing the scope of implementation.
Another solution is to reduce the number of integrations or simplify them. Integrations are the most difficult element of implementing any online store or B2B ecommerce, and simplifying them or reducing their number can help increase financial security and the predictability of costs.
💡 Read our post about whether it’s possible to implement a Magento MVP first and develop it later!
During implementation, it is worth checking the online store regularly, about every two weeks. Every two weeks, we should observe the development of the online store or B2B ecommerce, continuously adding new elements.
Regular checks of progress increase security by allowing early detection of potential errors and avoiding additional hours of work. It is much easier to correct an element at the beginning of its development than when someone has already spent 380 hours working on it.
Another important step is to choose technology known by many ecommerce agencies or software houses.
Avoid technology that will make you dependent on a single technological partner. If something does not go according to plan in the Time and Materials model, you will not easily be able to change partners, as you cannot transfer your project to someone else.
I encourage you to choose technology that allows you to collaborate with many good companies. Choosing a technology used by only two good agencies is not a recipe for success.
It is safer to choose technology supported by at least 10 companies. If you notice that something is not right with the billing model and the ecommerce agency is unable to explain, for example, why there are large numbers of hours spent on the project, you can easily change partners.
The last point I would like to emphasize concerns the definition of an error in the contract with the contractor. In the Time and Materials model, if an error is made, you usually bear the costs of correction, as you pay the programmer both for making the mistake and for fixing it.
Therefore, it is important to clearly define what is considered an error in the contract. The ecommerce agency or Software House should agree to introduce a definition of a gross error.
If something was done contrary to the order, the agency should not receive payment for such a task. For example, if there was supposed to be a password reminder on the login page, the agency coded an Instagram feed instead. This is an extreme and exaggerated example, but it shows the errors involved well.
After noticing an error, the agency admits the mistake and declares correction. However, when settling in the Time & Materials model, the agency expects payment for actions already taken and error removal and implementation of the correct function. In such a case, it is worth having a provision that the ecommerce agency should not charge for the errors made in the case of gross errors.
The Time and Materials model, taking into account all these points (perhaps except for the first, which is essentially a fixed fee model), increases security and makes this billing model attractive.
You get the benefits of something getting done faster while having a higher level of financial security and budget predictability for implementation.
Predictability means that you will pay about as much for project execution as estimated initially.
If you are considering Magento implementation, contact us. We will prepare a solid estimate for you for the implementation of your online store and present our plan of action so that the final implementation budget will be as close as possible to the original estimate.
