While involving the software development firm, you sign an agreement and the billing contract. There are several financial models of cooperation with IT companies. To choose the right one, you ought to pay attention to the opportunities offered by the specific pricing model.
First agreements were traditionally constructed upon fixed cost model, though today there is yet another more flexible business model – time-and-material.
Today we describe these two the most popular pricing models: its pros, cons, and particularities. We also share our expertise and provide some examples from our practice, which pricing model to choose while developing the specific product.
Picking the right pricing model is a common problem since the pricing model ought to fit your corporate operating procedures and processes, business requirements and goals, as well as general expenses borne by the vendor.
Want to know how to choose the right pricing model? Let us guide you!
What is Fixed Price Model?
Fixed price is a type of billing contract, where you pay for the completed scope of work. To determine the scope of work, we usually perform several steps:
Step 1: Our business analysts participate in the first call with the potential client or listen to the recording. The primary goal is to get a better understanding of the challenge and gather requirements
Step 2: The primary goal of this step is to analyze the requirements and to develop a well-documented roadmap that contains main project milestones.
Step 3: After all requirements are analyzed and roadmap is developed we can provide the precise project estimation. Finally, everything we should do is to make several slides and present those slides to the client.
These way, the client can expect the final price of the project before it starts. Fixed Price model assumes that the total budget of the project is approved before development starts and stays unchanged during the development process.
The specific deadline is also approved. It is critical to discuss everything before the project starts. The fixed-price model ensures that a project is completed and delivered within a specific timeframe and budget.
Fixed price simplified
This model might appear convenient for you as you are aware of how much time and money the project development requires. With a fixed-price project, the client and the vendor both take some risk. The contractor bears the risks for execution of works. If the client wants to bring an entirely new feature to the project, he will pay extra.
Fixed Price Advantages:
1. Strict costs
The client knows the budget of the project from the very beginning, before the project start. After signing the contract, it won’t change in any case.
2. Timeline Limitations
When the vendor knows the complete list of features that power the app, he can develop the roadmap and plan the workload of a development team. It is easy to complete the project on time when you have a precise plan.
3. Process predictability
It is easy to keep everything under control when you have a roadmap. You can easily predict project completion when we track the single activity of every developer in your outsourcing team.
4. Easy management
With Fixed Price agreement all the project features are well-documented so that they can be quickly passed down to the development team without additional approvals with the customer.
Fixed Price Disadvantages:
1. Insufficient flexibility
As we’ve already mentioned, if the project requirements changed during the development process, the client would be additionally charged. So it is the most significant weak point of fixed-fee arrangement.
2. Less liability
The development team principally carries the direction described in the project specification. So you don’t need to devote any additional time slots you participate in the ongoing discussions and meetings. But sometimes, it may seem to you, that you are in the dark concerning the workflow and project status.
Fixed Price is the most suitable:
1. To develop the MVP
Minimum Viable Product is an application that can solve the specific business goal, although it may not work smoothly or have the pretty user interface. For example, we are often asked to develop MVP to proof the particular idea or hypothesis. The customer knows, what exactly he wants so we could provide the explicit specification and proof the idea for a fixed cost and known budget.
2. To develop small, but a well-specified project
Often huge companies outsource product engineering to multiple vendors at once, so each vendor is asked to create a small part of the enormous solution. Each piece of the project is well documented, so all the vendor should do is to complete the part of a project in time and fit the budget. There is no even talk about future support, maintenance, and improvements — just a one-time job.
What is Time & Material?
In comparison to Fixed Price, Time and material (T&M) is entirely different, and it is usually used with the agile project methodologies like Lean, SCRUM, Kanban.
For a better understanding of T&M billing contract, let’s have a short look at the agile project management and how it works, and as an example let’s take SCRUM.
Before the project starts business analysts develop the project specification, but after the spec is ready they divide the development process into several milestones.
Milestones are divided into so-called “sprints”. A sprint is a default unit of time measurement and usually lasts from one to two weeks. After the first sprint is complete, the development team and a customer set up a meeting and discuss the process and results. During this meeting they develop a backlog: a list of features to implement in future. The backlog usually looks like a well-documented report, where all new features have strict priorities.
After the meeting, they start planning the second sprint with an eye on the milestones and the backlog. These way the vendor enriches the original specification with the new features at every sprint, what makes our product more flexible and satisfy the market needs.
If the customer signs a Time and Materials contract, he is billed after every sprint (monthly or per sprint) according to the number of hours the development team spends plus costs of materials (custom software licenses, hardware, and etc).
Time and Materials simplified
Time and Materials Advantages:
1. Versatility and customization
Projects developed with Time and Materials help customers to build vibrant and complete applications, that satisfy both the customer and its clients. With Time and Materials, we can improve the project specification during the development process by adding new functions and features, what makes the solution much more competitive.
Time and Materials contracts make it possible to modify the development team, make redesigns, even switch project focus after the project already started.
3. Ongoing decisions
For some small and medium-sized companies, it is critical not to make many responsible choices at the one moment, because it can affect the overall company workflow and stability. Such companies prefer making ongoing and step by step decisions, and, well, Time & Materials and Agile allow them to do so.
4. Vendor responsibility
It is a common situation when the vendor develops an application without thinking about any future support, and deliver the project like a one-time job. But the Agile development makes him think while writing a single line of code because he will maintain existing and develop future features at least until the project ends.
5. Instant start
Some projects require immediate start, and basically, you cannot just start development without any specification. T&M helps us to begin the process knowing only some basic features. Other features will be added during the next several sprints.
1. Budget and deadlines indeterminacy
We know that the project development often consists of sprints, but often we do not know how many sprints will take place until the project finishes. This way, it may seem that the development process is endless.
But one moment should be taken into consideration:
This issue can be overcome if the vendor delivers the new version of a product after every sprint, and it is pushed into production as soon as possible with the continuous integration tools.
The users get the latest version, and the developers and customer collect feedback. Such an approach helps to earn profits from beta and proofs the value of the application for the users.
We recommend using the T&M while:
1. Developing complex long-term projects
Today it is difficult to imagine the long-term project with the complete specification. Ten years it was OK for a specification to contain from 120 to 200 pages describing all the features of the application. But today we live in the extremely fast-changing world, where we have no time to take a break, so we are not even talking about writing a complete specification.
2. Developing a startup
There are two stages of a start-up: before and after the first huge investments. Usually, we need to build MVP first to prove the idea, where Fixed Costs contracts suit us well. But after we already showed the concept, we need to improve the product continuously. Usually, the start-up does not have a complete specification and strict deadlines, and it is only about the product and the value it brings to the customers – here is the best option to sign a Time and Materials contract.
As you may already see, there is nothing complicated. We hope, you understand the main points and differences of that two pricing models: Fixed Cost and Time and Material, and will conclude an agreement that will satisfy you and the vendor, what helps them to deliver the project in-time and fit the budget.
By the way, we are developing, testing and delivering cool applications and software solutions, so if you are interested in free project estimation – check out our portfolio, contact us via the contact form or drop us a line.