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Fixed Price: Hidden Cost of Software Development

Last year Everest Group revealed that financial organizations prefer to outsource IT-related tasks (including software development) at a fixed price. In fact, the popularity of this model has grown from 30% in 2011 to 40% in 2014. And it’s a common tendency for many industries. Is the Fixed Price approach suitable for your project? What are the advantages and disadvantages of such cooperation? Read on to find out!

Fixed Price contract: pros and cons of being inflexible

Ok, you’ve got an idea for a mobile game & consider looking for an offshore company. As a customer, you definitely care about the outcome of your project – and not the means by which the goal is achieved. Well, the Fixed Price (FP) model might work for you!

Here’s what you should do:

  • Contact a reliable vendor and provide him with clear project requirements (you know exactly what your app does, how it functions and what features it must possess);
  • You discuss all the project details, and the vendor comes up with a proposal (including the expected schedule and billing);
  • Once again, you negotiate every aspect of your possible partnership. If you agree on a budget & time frame, the development process begins;
  • The project scope is broken down into several stages (iterations) with certain goals and deadlines. A typical iteration lasts for 2 weeks;
  • You review & approve prototypes at the end of every iteration;
  • The vendor delivers your long-awaited application.

Sounds great! And the model surely has its benefits:

  • Apart from iteration approval, the dev process requires little to no supervision (everything is well-documented & agreed on beforehand);
  • You know what to expect (for the same reason);
  • You can predict the cost of outsourcing software development (you’ve negotiated the price, and it stays the same unless you enhance your app with extra features).

Well, now it’s clear why clients prefer Fixed Price to other IT outsourcing pricing models. They simply want to mitigate risks; after all, 33% of IT projects exceed budget by 10-20%. In case you’re a startup & are pressed for money, you have to plan expenses in advance.

FP looks good on paper. Does it work in the real world?

Fixed Price project and its downsides

  • Waterfall methodology. Waterfall (or the traditional approach to software development) has been around since 1970. A typical FP waterfall project involves 5 stages: requirements analysis, design, implementation, testing and, finally, product release. It means that you (or the company you’ve addressed) have to prepare a detailed project plan before a single line of code is written. Also, you cannot make any changes to the contract unless you sign a supplementary agreement (and it impacts the whole product development cycle, to say nothing of extra costs). If there’s an error, your vendor cannot just go back to the bug-free stage and fix it (there are deadlines to meet, after all). The methodology saves testing for last, and you’ll be surprised to learn how many mistakes it will expose. Sure, the vendor will debug the soft at his expense, but your project will run over time anyway (just like 7% of all IT projects do). And what if your competitors are working on a similar application and the market window for the product is very tight?
  • Comprehensive project requirements. The whole Fixed Price thing is based on the assumption that a client will come up with a through technical specification of a project. For a non-tech guy who’s been struck with a brilliant app idea, it takes an MVP and months of research to write a decent requirements document (again, you’re losing time). You can of course ask an outsourcing company to prepare the document for you – after all, vendors possess the necessary expertise and human resources to get things done a lot faster. Expect no charity, though. For large (and long-term) IT outsourcing projects the cost of requirements analysis sometimes exceeds $ 10 thousand;
  • Lack of management & direct communication. Even if you choose between more flexible IT software outsourcing pricing models (Time & Material or Dedicated Team), there’s going to be a lack of direct communication between you and your partner. FP a priori involves no management on your side. That’s right, you approve iterations and may be hands-on the project to some extent; yet, it’s the vendor who takes the entire responsibility for cost control, quality assurance and management. And he’s not sitting in the next room after all. When it comes to outsourcing, keeping in touch with your development team is often more important than clear requirements. In fact, poor communication is the reason why 28% of IT projects fail. There also cultural differences which attribute to 16% of outsourcing failures. Are you sure Fixed Price is what you need?

Fixed Price Hidden Cost of Software Development

Dark side of the Fixed Price model

As a rule, an outsourcing company allows its clients to make a few changes to the scope for free. But patience has its limits. Once your project turns into a Lernaean Hydra (every new task & feature brings even more tasks to handle), be ready to sign multiple supplementary agreements and pay more. And more.

Wait, but “you know what to expect” was certainly listed among the Fixed Price benefits!

Sure it was. But there’s more to the FP time and cost estimates than you think.

According to Steve McConnell, a notable expert in software engineering, software development project estimates are never accurate. That’s right, never. A vendor can possibly provide you with a realistic figure & time frame if he has worked on similar (it’s better to say “exactly the same”) tasks before. In all other cases, the company will have you renegotiate the initial budget (you’ll end up overpaying) or turn you down.

There’s also another scenario. A vendor agrees upon a smaller sum and struggles to deliver a project on time. The nearing deadlines might improve his productivity. What about the quality of coding? It’s just the opposite. Instead of doing more tests and code review, developers literally stick to your requirements and work halfheartedly.

You’ve probably heard that 50% of IT projects fail. The deadlines are surely important. But isn’t it better to launch a 100% reliable product than to limit your partner with an unfair contract & get a “satisfactory” result?

Signing a Fixed Price contract certainly has its pros and cons. The approach proves to be cost-effective for medium-sized projects with clear scope & goals. FP also works for enterprises that do have in-house IT departments & can deliver accurate technical specification. In other cases you should consider Time & Material or Dedicated Team. Provided you find a company you can trust, your outsourcing project is doomed to success – no matter what pricing model you will choose.

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