How to choose the best software development pricing model for your project

Before creating a tailor-made technological solution, you need to not only hire a reliable IT service provider but also choose a pricing model. Simply put, a pricing model is a type of contract that defines the spread of activities, timeline, and the overall cost

Most importantly, it determines what the customer actually pays for: the number of hours spent, the end result delivered within a certain time frame, or the work scope.

Fixed Price, Time and Material, Mixed Mode, and Dedicated Team are the most popular payment agreements. As each of them suits different project types, it’s challenging to decide which one is the best option. But don’t worry, we’ll help you find a perfect approach for yours! In this article, we’ve compared the top 4 software development pricing models. Take a look!

1. Fixed Price

This contract specifies business and technical requirements, product release date, and the overall cost. Since the key priority is to meet these terms, it’s very important to prevent various issues - extra work, prolonged stage approval process, etc.—that may lead to delivery delays and budget overrun.

Therefore, correct estimation and task planning are critical elements of success. So, define the app/website goal, prepare a detailed technical specification, create mockups and wireframes.

As it’s difficult to do without specific background, consult IT experts: business analysts, project managers, engineers specializing in the necessary field (if you need, for instance, a blockchain solution for an insurance firm, turn to a custom blockchain development company that has already helped underwriters accomplish their business objectives).

When concluding a Fixed Price contract, the following issues can arise:

1. It’s difficult to alter the scope as it leads to changes in the agreement and increased time-to-market. “Why should I discuss new terms and revise the agreement?”—you may ask. Developers can offer meaningful suggestions, for instance, recommend adding a new feature based on early user feedback or using innovative technology to obtain a better result.
2. An IT company has to deliver a specified work scope on time and budget. If something goes wrong, the process is prolonged due to fixing problems. To meet deadlines and fulfil the contract, engineers can less focus on Quality Assurance or other critical activities. Hence, the end quality may suffer.

   Sometimes challenges arise regardless of the team’s professionalism and efforts. For example, the key specialist may get sick. Surely, an IT outsourcing service provider will soon replace it but a new team member will need some time to familiarize itself with the project.

3. The final price is often higher compared with other software development pricing models as engineers have to prevent risks associated with a budget overrun in case of changes. That’s why an IT service vendor often raises the end cost by 40-50%.

Strict deadlines, finalized price, and complete predictability are the primary benefits of a Fixed Price contract. Since everything from the scope to time frame is specified, you don’t have to participate in the app/website development process. You receive the product done exactly how you wanted. However, it may not be the best digital solution that you could get.

Choose a Fixed Price model when:

1. You need to build a website or application within a certain budget and time period.
2. The project is small or medium-sized: the implementation will take less than two months.
3. There is a clear technical specification. The more details you provide — mockups, roadmap, functional and nonfunctional requirements, etc. — the better.
4. You are not going to be involved in the process, checking each task, making suggestions, and approving each iteration. The priority is to completely delegate software-related activities to professionals and get results.

What do you pay for: the exact work specified in the contract between your business and an IT outsourcing company.

2. Time & Material

Time & Material model offers the highest level of flexibility. The spread of activities, approximate budget, and project duration are still estimated but can be changed if necessary. The key advantage of T&M is that it enables the customer to easily alter the requirements.

Changes can be initiated for many reasons that involve:

1. A competitor launched a very similar mobile application, so some functions have become irrelevant.
2. You want to add a new feature to cover another business task. Say, you’re creating a CRM system providing a user base, contacts, and a lead management dashboard. Feeling that this functionality is insufficient to perform the necessary tasks, employees are asking you to integrate a calendar and push notifications.
3. As early users don’t like some design elements, the process is adjusted to meet their preferences and achieve success.
4. After project discussion with IT specialists, you understand that some things can be improved/done in a better way.

Choosing a T&M contract, the client participates in the development process testing a product, making suggestions, approving each stage, and even monitoring the time spent on each task.

Therefore, you have a direct impact on how your solution will work and look. As there are no strict deadlines and budget limitations, specialists are free to offer recommendations and share ideas on how to improve the outcome.

Time and Material is the best pricing model if your primary goal is to fight off competition, surpass user expectations, and generate income.

Choosing a T&M pricing model, you may encounter the following issues:

1. Uncertain deadlines and budget. Any changes to the work scope can postpone time-to-market. Since the end cost estimation is approximate, you can’t be sure how much money you will actually spend.
2. You need to monitor the development process. If you’re too busy with everyday business tasks and responsibilities, it will be quite challenging to constantly participate in it. In this case, we recommend connecting with the team each one-two weeks, watch demos, and check the result of each iteration, which generally lasts for 14 days.

Choose T&M when:

1. The key objective is to deliver the highest quality possible.
2. The task is to develop a large project lasting over two months.
3. There are no crystal technical specifications, restricted time, and limited budget.
4. You want to be connected as a Product Owner to have a real impact on the work scope and project outcome.
5. You want to build a digital solution for further supply, for example, selling it to other businesses. This is also a perfect model for creating apps that ensure outstanding user experience.

What do you pay for: The actual time spent by the team and materials utilized to deliver the product. Payments are carried out within set intervals, for example, every four-six weeks.

3. Mixed Mode

Being a combination of Fixed Price and Time & Material contracts, Mixed Mode is based on strict deadlines and flexible changes. This is a perfect option when you aim to release a product within a certain timeframe but the requirements are unclear.

While in Fixed Price each shift in specification results in agreement revision, postponed release, extra costs, Mixed Mode allows avoiding these risks.

Choose a Mixed Mode pricing model when:

1. The purpose is to launch a digital solution as soon as possible.
2. The project is small or medium-sized (will take less than two months).
3. The project duration is set but Fixed Price doesn’t fit your needs as the requirements are incomplete. You want to achieve the best result and are ready for changes.

What are you billed for: The number of hours spent by an IT service vendor on making your website or application.

4. Dedicated team

The main advantage of this pricing model is the highest level of control. You can request resumes of potential team members, personally interview them, decrease/increase the team size depending on your needs, directly communicate with each specialist, determine the workload, assign tasks, and monitor their completion.

This approach is similar to assembling an in-house team but here you don’t have to spend a lot of time and money on things like recruitment, onboarding, training, holidays, workplace, software licenses, bonuses, and health insurance.

Working with a dedicated development team, the following issues may arise:

1. As you are responsible for team management, you need to spend time and make efforts to control the working process.
2. It’s quite difficult to predict the end cost before starting the project as it is composed of hourly rates of all team members, so you need to know the exact number of hours spent by each specialist.

When a dedicated team model is the best option:

1. You want to have a direct impact on the development process. It’s an especially great model if you have solid experience in project management.
2. The goal is to control the work scope, budget, task completion, and other things during product creation.
3. You want to personally assemble the team checking out resumes, verifying qualification, holding face-to-face interviews (e.g., via Google Meet, Google Hangouts, Skype, etc.), as well as be able to quickly scale the number of specialists up or down.

What are you charged for: The end cost consists of team members’ salaries and management fee (administration work) that should be specified in the contract. Generally, payments are made on a monthly basis.

Final thoughts

Each project type perfectly matches one of the four software development pricing models. The choice depends on many factors that include duration, budget, product complexity, the level of control you’d like to have, and the end goal.

For example, if you aim at creating a small digital solution for internal business needs, say, a mobile reporting app or a five-page website, a Fixed Price contract will be the best option. But if the primary objective is to sell the created system to other organizations and you want to control the development process, scope, workload, etc., think about using a dedicated team.

Here at Arateg, we employ all of these contracts depending on the customer’s project requirements. If you have questions about this topic or would like to address some technical issues, drop us a message and we’ll help!