Fixed Price VS Time and Material pricing model
There are two main questions that each client asks prior to starting development of software product: How fast it can be done and How much it’ll cost. While each company prepares time & cost estimation, there are no possible ways to come up with exact figures that will remain intact until the end of the project.
There are always additional requirements and unexpected technical problems that arise in the course of development. After all, each product is unique, and its value depends on features that it offers to the market.
Thus, pricing usually becomes the main subject for bargaining. Customers want to have as many features as possible and developers tend to stick to the initial plan or request additional time and budget to implement them. Hence, there are two pricing models that benefit both client and software development team: Fixed Price and Time & Material.
Fixed price is usually applied to small projects with set deadlines and clear requirements. This is the best pricing model for development of MVPs, prototypes or simple software solutions with a limited set of features.
Better suits for projects with:
- Fixed deadlines.
- Fixed or limited budget.
- Specified project scope.
If you’re working with Fixed price model all specifications and requirements should be well-written prior to the development process. You should deliver your vision to developers as clear as possible in order to ensure that final product will meets your expectations.
Therefore, choosing fixed price model is preferable when you need a pilot version of software that may be upgraded over time or software tools for internal use that can be modified later.
- Lower price tag for simple solutions.
- Final cost of the project doesn’t exceed the budget.
- All risk and unexpected expenses are carried by the development team.
- No possibility to make changes on the go.
- Higher average rates for development since contractor takes into account all risks.
- Overall quality may suffer because of poorly written specifications or unreasoned deadlines.
While through the eyes of customers Fixed price model is considered as the most convenient and straightforward, you should be prepared that those strict limitation will affect the quality. At first, this drawback may seem insignificant, but from our experience, there are ALWAYS additional wants and needs that occur during development process.
Thus software development market shifts to more flexible Time and Material pricing model.
Time and Material model
You may say that this model is more advantageous to software developers since there are additional loopholes to raise the budget by accounting additional time. But let me ask you a question: Do you need a known price or a fixed price?
In order to counter these doubts, we strive for maximum transparency. All accounting and communications between developers are handled through dedicated task manager, where the client can always see the overall progress of the project and each task separately.
In addition, our Project Manager sends weekly reports and a plan for the next week. Plus, we make a dedicated skype call with a presentation of results we’ve achieved after delivery of each milestone.
Therefore we encourage our clients to go with Time & Material pricing model as long as all our actions are in sight of the customer.
At the same time, we understand that any business seeks certainty and stability. Entrepreneurs usually require precise figures and deadlines that could be transferred to their budget.
But take another perspective and think about the project‘s budget as if it’s part of your business model. It’s true that you’ll have exact figures while planning spendings for 1–2 months ahead, but if product’s development takes more than 3 months, it is natural that you couldn’t foresee all expenses.
That is the second reason why for complex software development projects we advise to opt for Time & Material pricing model.
- 100% meets your expectations.
- You can adjust contractors workflow to your schedule.
- Total control over the budget and final version of the product.
- Flexibility. Multiple changes in the initial project’s scope are possible.
- The project cost may drop down if the milestone is delivered faster.
- Know what you’re paying for. There is no hidden fees or additional expenses that may be included if you’re going with fixed price model.
Because of flexibility T&M is the best pricing approach for Agile software development. Given the quick market growth and short span of new technologies, the possibility to make quick changes on the go ensures that final product will be delivered on time and fit consumer needs.
The vast majority of costumes initially assumes that Time & Material pricing model is much more expensive than Fixed. And most of disputes on this matter are eventually going around “price vs quality” arguments. However, this is not true.
As shown by the market, stiff price competition is pushing developers to lower their hour rates. Eventually, the project may cost you even less than if you were going with the Fixed price model.
Moreover, regardless of which one you choose, both Fixed and Time & Material approaches grant decent level of quality and control over the course of software development.
After all, the question is whether you choose the right team to care about your project.(-;
Originally published at gbksoft.com.