Building a digital product may require outsourcing development, and when hiring an outsourcing partner, a fundamental question is the pricing model, as you will outsource a big part of the work. While working with software development outsourcing, there are two pricing models to choose from – Fixed Price and Time & Materials. Both options are good enough, but it’s crucial to pick the relevant one for your business.
So, here are the three pricing models:
- fixed price
- Time& materials
- Mix of the two.
Let’s find out the pros and cons of both software development pricing models for outsourcing.
1. Fixed Price
In this time of contract, the price and quantity of work are fixed. Usually, both parties specify business and technical requirements, product release date, and price while signing a contract. This is a good option for those who want to ensure that no extra costs will appear during the project.
In Fixed Price, it is essential to have all the necessary documentation for the project, including instructions and responsibilities to implement the plan. This method
should only be used when you are confident that the product requirements will
not change in the future. And, in case of
force-majeure, you can sacrifice the quality of the product to strict deadlines
and fitting to the fixed price.
Pros of the Fixed Price model:
Stability and accuracy. When you discuss and set all requirements and the price beforehand, you can get what you need, with no surprises.
Meeting deadlines. The development process and the deadline are discussed in advance, so the deadlines will not be violated.
Cons of the Fixed Price model:
Not enough flexibility. With a fixed price model, the main issue is in unexpected edits or extra tasks that may appear during the process. You will need to add improvements to your contract or pay extra expenses. To avoid such a situation, it is better to use the hourly rate method and consider the time it takes to complete the project and the number of tasks.
2. Time & materials
Time and Material Project (T&M) – with this model, the price is based on the project’s time. This model is more relevant in cases where it is problematic to determine the finished product’s exact cost. T&M is suitable for small medium-term projects and a small team.
Pros of the T&M model:
High flexibility. The client can quickly change the project needs or add some edits to the work plan or requirements for the final product. And, this model is still a good fit with modern agile methodologies such as Scrum.
Can lead to really great results. This model brings the ability to see the result at all stages and continuously monitor the progress of work and interact with the team.
Cons of the T&M model:
Higher expenses. It is not always possible to estimate the budget in advance. It all depends on the accuracy of the instructions or its changes in the process.
Time-consuming communications. With this model, you may have to spend a lot of time communicating with the customer. On the other hand, it will improve the quality of the finished product.
3. Mixed Price Model
The combination of both Fixed Price and Time & Materials will bring flexibility and still strict deadlines.
Pros of the Mixed Price model:
Flexibility and efficiency. You can avoid the risks of agreement revision, postponed release, and extra expenses. With this model, you can get high quality and still get benefits from the fixed price model.
Cons of the Mixed Price model:
Difficult to mix both models. Of course, while mixing both models, some difficulties may appear. You will need to spend more time on agreements and document overflow.
A fixed price is the right pricing model if you are building a simple product, like a landing page or a corporate website where functionality is straightforward, limited, and requires not much time. One of the
problems associated with the lack of the necessary functions leads to problems
with integration. The most valuable product features usually take more time to accomplish closer to the end of the MVP development phase.
For large projects without an exact completion date and/or with significant functionality to be developed, involving a large development team and/or involving long-term continuous development, support, and product scaling, the T&M model is much more suitable than FP. T&M provides flexibility and the ability to deploy development, if necessary, at any stage of the project.
In case you need more flexibility but still want a fixed price and strict deadlines, you can combine both price models.