How to Track Project Budget in Time & Materials Contracts

Project Manager

Outsourcing your project to a team that you don’t always know a lot about may come with doubts. The answer here can be a Time & Materials pricing model, but only if it comes with the right project budget tracking. If it’s done on a regular basis, you’ll be surprised how smooth the process can be. 

Here’s how you can control every step of the process without slowing down the work. 

Time & Materials as a kind of agile contracting 

According to What Contributes to the Success of IT Projects study, 38% of projects based on Fixed Price contracts were successful, while Time & Materials contracts led to 83% of successful projects. The same study indicates that great communication between the client and the software house is a major success factor. 

As a client who outsources the project you obviously want to pay just for the effectively worked hours. The good news is that you may have the project done this way when you choose the Time & Materials model. It gives you control over the project as it’s flexible and makes you pay based on the number of hours spent on the project.

What helps to track a T&M project is that the development team usually works based on the Agile methodology. This approach breaks the project into shorter sprints, which comes with frequent collaboration and constant communication with the dev team, so you can see continuous improvement. To keep the process smooth, you should give regular feedback, accept work or request changes, and refine backlog

You can add new features in every sprint because the product is built in an iterative way. The effect of every sprint is a functioning feature that you can test to make sure the project is on the right track. So the Agile approach leads to a transparent relationship between you and the dev team. This is why you should keep the software house updated every time as soon as you recognize the need for making changes

In this scenario, T&M requires your close involvement, but it pays off in the end. When both sides react to changes quickly, you won’t end up with useless features. This is because the initial arrangements are usually different from the final project. This means that you can adjust requirements and change features whenever it’s needed, so it’s great for long-term projects. But, how do you know that the dev team doesn’t waste time (which equals money)? 

Let’s dive deeper into it. 

Control over the project budget 

One of the first questions that spring to mind is how much it will cost. The fixed-fee agreement comes with no flexibility. When the project starts exceeding its budget, the vendor will do everything in his power to reduce costs and finish the project to meet the deadline. It, of course, usually comes with code of lower quality. Or you may end up with a feature-packed product that doesn’t meet users’ needs and expectations. Keep in mind that the vendor always adds up to 50% included in the final price as a buffer for unexpected things that may arise during the development process. Usually, the less information you provide, the higher the charge can be. And when you want to make changes in the Fixed Price model, you’ll probably need to sign another contract with a new price or an appendix to the original one. 

On the other hand, billing on T&M means that you will have all the needed features, but the final price of the product can be much higher than you expected. However, you can always put a cap on how much you can spend on the project upfront. It also works the other way — when the project scope reduces, you won’t overpay. When you pay just for the effectively worked hours, you will avoid uncontrolled price growth. 

The thing is that if the project based on Time & Materials contract took 1,000 hours, it must have taken so long. The upside to real-time project budget tracking is that you know exactly what your money was spent on.

You can scale up or down your budget based on your needs. How the project is executed is defined in the contract, so you know what you can expect from the very beginning. The cost is based on actual time spent, so you always know the hours spent and material expenses. It ensures that the project won’t go too far out of scope. Overall, you avoid the price bidding process and get what you pay for.  

Project budget tracking 

There’s no question that you want to know how the project is going and stay informed about all the surprises on the way. In the Time & Materials model, you can expect regular interaction with project management, so you always know the status of the project. But, remember that when there’s a need for making changes, the budget may slip from the estimation. 

The most possible risk when building a product based on T&M is running out of money when it occurs that you need to add features you didn’t think about.

Keep in mind that it’s not always easy to evaluate a new product, especially the most innovative one that goes with specific requirements that can be hard to predict. It’s difficult to guess what may happen and what changes need to be adapted in the scope in various phases of the project. Even if you know how exactly the product should work, creating accurate documentation before the work starts is rare. 

Remember that the dev team gets a realistic view of your project while it’s in progress, so they can see how complex it is and find the weakest areas of the project to ensure smooth delivery. 

You should expect the software house to give you regular updates, so you will know every phase of the project. 

For instance, here at Studio Software we share weekly time logged reports with our clients so that they know the time spent on every feature of their project and stay assured that the remote team doesn’t waste time (and money).  

We go even further and provide our clients with an Excel project tracker with 24/7 online access. The document consists of project estimation as well as time spent on each and every element, and is updated every week so that the client sees the whole picture. 

Both parties are on the same page, as every change and the entire progress is discussed with you regularly and as frequently as necessary. 

Time & Materials equals effective collaboration  

When the T&M pricing model is combined with the Agile approach, you’re sure that the dev team reacts to every change you need to make in the project. Plus, when the team feels that they have a real impact on the project, they try to understand your needs and are more keen to suggest changes and search for the most effective ways to build your product based on their experience. 

You know exactly where the dev team is at any point, so this approach brings you closer to success. A real win-win. 


Choosing the right pricing model can be tricky, so think twice before you sign a contract with the software house. The goal for everyone is to have a fully functional product on time, with minimal risk, and a reasonable budget, so choose carefully. 

Keep in mind that the Time & Materials pricing model works well for IT products or services with a number of variables. This is because of its flexibility and transparency, so you can make changes as soon as you need them. Also, thanks to real-time project budget tracking you always know where your money goes. 

Wondering what’s the best pricing model for your next project? Drop us a message at [email protected]. We’re here to help! 


Related Posts
21 July 2022
Agile teams: What are their characteristics?
“Agile is about avoiding delay and delivering business value that you really need to the…
Read more
25 October 2022
The MoSCoW technique – how to prioritize tasks in a project
In IT projects, the number of tasks that need to be done can initially seem…
Read more
13 September 2022
Risk Register in Project Management – Why Is it Important?
Risk analysis is a component of project management that allows you to prepare for unplanned…
Read more