Software development pricing models

Contrary to popular belief, outsourcing isn’t just about finding a dedicated software development team. The potential collaboration’s success lies in having a shared vision, understanding the goals, and committing to the project as one team. Another key to success is to choose the suitable pricing model before the cooperation starts.

If you understand the ins and outs of different pricing models, you can plan your finances accordingly to make sure that your project is delivered on time and budget. In this article, we highlight important aspects of the three best-known software development pricing models. This short guide will help you choose the right one and get the most of your collaboration with a software development company. Let’s dive in.

Article content

1. Fixed price: what lies beneath it?
2. Time and material: the ins and outs
3. Dedicated development team: when and why to use it
4. Conclusion

Fixed price: what lies beneath it?

A fixed price model is usually based on an estimate of specified scope of work. There are two main factors that influence the final price and timeline of the project:

• Project documentation
• Choice of team members

Having an accurate project description in place, be it UX wireframes, UI design, project specifications, or all of that, our company estimates how much work needs to be done and how much time it will take. Considering specific business and technical requirements, we choose team members who are the best fit for this particular project. And here comes the key aspect of the fixed price model: once all the terms and conditions have been hashed out and the agreement signed, the cost and the set of functionalities remain unchanged.

In most cases, the fixed-price contract requires a prepayment, and the client makes all further payments according to the schedule specified in the agreement.

Pros

• Fixed price means a fixed scope of work, clear delivery schedule, and strict deadlines.
• It requires little to no involvement from the client’s side since all details are specified in the agreement.
• Work process is predictable, as all the subtle aspects have been discussed and documented.

Cons

• Fixed scope means an inflexible development process. Any additional features that have not been specified in the contract need to be discussed and will come under a new agreement and new terms (e.g. cost and time).
• The final cost is often higher than in other pricing models since the development company has to cover possible risks associated with budget overruns.

See also: 10+1 Steps to Building UI/UX Design for Startups >

Time and material: the ins and outs

Most development companies suggest using the time and material software cooperation model. But what exactly does time and material mean? This pricing model assumes you pay only for the time and resources spent on the project. But it does not mean the absence of any boundaries. The vendor estimates the time frame, the scope of work, and the budget, but they remain flexible, and it’s the client who gives the green light.

Usually, developers record the time spent working on the project and the tasks completed. The client, in turn, makes regular payments(for instance, at the end of each month) for the number of work hours multiplied by the agreed hourly rate.

The time developers spend working on the project can vary anywhere between 80 and 160 hours per month. As a rule, the client and the company cap billable hours and agree that developers cannot be involved in other projects simultaneously. If the client doesn’t give any additional tasks, they only have to pay for a certain number of hours a month (as agreed with the dev company).

Pros

• Development process is agile and lets you play with priorities, remove or add features to keep the overall cost in check and ensure the product still fits the market demand.
• You can track progress and pay only for the hours spent developing your product, no prepayment needed.
• The client can choose the level of involvement: they can either manage every iteration, and guide the process in the right direction or have a Project Manager from dev company’s side to do that work.

Cons

• Flexible development might create some uncertainty. Even minor adjustments to the project can push back the final release date, and your project might become overdue.
• A vague understanding of the total budget since the final price depends on the range of features and the changes made.

Dedicated development team: when and why to use it

A dedicated software development team model is often used when you need to have dedicated developers working as a team or side by side with your in-house team. The client and the vendor agree on a fixed monthly payment for the entire team, and the client can either manage the work process on their side or have a dedicated PM as a part of the team. No matter how many hours the team puts in, the monthly cost is always the same. This can be an advantage or a disadvantage–it all depends on your workload.

This model is perfect for large-scale projects, especially when working with big teams. In such cases, you often pay less for a dedicated team than you’d pay for a month of work on a T&M model (hiring dedicated development teams often comes at a discount when having a longtime relationship). But to fully benefit from this pricing model, you need to have solid experience in project management.

Pros

• You manage and control the development team, and you can upscale or downscale it when needed.
• You don’t have to cover administrative costs, yearly bonuses, sick leaves, or vacations.

Cons

• The payment is fixed no matter how much work was done. If developers worked less (there were roadblocks or some downtime), you still have to pay the same price.
• Either the client or the dev company can manage the whole working process. In case it’s the client who takes control over, the dev company only provides a workforce.

Conclusion

The choice of the pricing model depends on many factors, including project duration, budget, goals, complexity, and the level of control you’d like to have.

A fixed price contract can be a good option for small-scale projects or proof of concept stages that don’t foresee any changes to business requirements or use cases. Long-term projects with ever-changing requirements or without a set scope of work are better to do on a time and material basis. Finally, a dedicated development team is your go-to option if you want to get dedicated developers and boost your development capacity without hiring full-time employees, and be flexible with a team size and development process.

At NERDZ LAB, we believe that each of the pricing models can be the right one for a certain kind of project. Contact us, and we’ll be happy to guide you through the possible pricing options and choose the one you’ll benefit from the most.