Software Development Pricing Models Review

When outsourcing, customers typically take the Fixed Price approach to plan costs in advance, be less involved in product development and mitigate risks. However, the Time & Material and Dedicated Team IT outsourcing pricing models offer just as many benefits. Which pricing model is right for your project then?

Insight into IT outsourcing pricing models

Outsourcing software development to a nearshore or offshore company has become a common practice for US and Western European businessmen. Previously driven by cost reduction, the outsourcing paradigm is gradually shifting towards increased value, long-term partnerships and access to alternative talent pools.
As a rule, software vendors bill their efforts according to three pricing models: Fixed Price (FP), Time & Material (T&M) and Dedicated Team (DDT). When choosing an outsourcing company, make sure your vendor provides all three options: neither FP- nor T&M-only companies put customers first and are mostly concerned for their own needs (that is, buffering against potential risks or bleeding their customers dry without caring about an outcome).

Software Development Pricing Models & How They Relate to Project Management Methodologies

Fixed Price

FP uses the Waterfall (or traditional) project management methodology and is a great choice for companies that prioritize cost planning over flexibility. The model is suitable for small, medium-sized and large projects with crystal clear requirements that aren’t likely to change over time and milestones that can be achieved within a definite timeframe. You negotiate the scope of work, sign the contract and make progress payments (usually in advance). As simple as that.
If you want to embark on an FP project, you might need a Software Requirements Specification (SRS) – a document which explains how software works, what it’s going to look like (having wireframes/interactive prototypes ready is desirable) and who’s going to use it. In order to compose a SRS, however, you should have profound knowledge of the development tools and technologies powering your solution, as well as user experience (UX) and user interface (UI) design – or outsource the job to a reliable software development company.
Writing a SRS is optional, though. In most cases that do not deal with rocket science, a detailed technical vision prepared by a vendor can perfectly replace a SRS, but there’s a catch. When you contact a software development company and briefly describe your idea (“I want to build a food ordering app like UberEATS”), no vendor will provide you with a tech vision straight away. What you’ll get is a ballpark estimate which uses UberEATS as a reference. The accuracy of such estimates seldom exceeds 30%, since every feature of your app has to be negotiated (and approved by you!) separately. If you’re fine with the ballpark estimate and ready to discuss the deal further, be ready to conduct several face-to-face/over-the-phone meetings with your Account Manager/Project Manager (PM) and team lead to specify the scope of work, decide on app features and tech stack and outline contract provisions. The accuracy of final FP estimates is pretty high (up to 90%). Once you sign the contract, you cannot make changes to the scope (that is, your app/website feature set) for free; every change request will be discussed and billed separately. The software development process will be carried out in stages (with testing saved for last).

Time & Material

According to the T&M model, you pay for the actual time and efforts spent on your project. The approach works best for large projects, innovative projects (including IoT and Artificial Intelligence software development), game development projects and projects with unclear or evolving requirements.
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The T&M model uses the Agile project management methodology which allows customers to be more hands-on with the project, prioritize tasks on the scope, negotiate the length of an iteration, etc. You’ll also outline your idea to a vendor, get a ballpark estimate and discuss the deal. Not sure how to explain the requirements technology-wise? You’ll get professional help!
You’ll work with your PM/Account Manager and development team to define and prioritize application/website features using the MoSCoW technique. The acronym stands for Must have, Should have, Could have and Won’t have features of a software solution; the Must and Should have features are ranked higher on your requirements list. As a result, you’ll get a fully functioning product a lot faster and (with the help of your vendor, of course!) will be able to conduct beta-testing, analyze user feedback and add extra features to the scope if necessary.
Besides flexibility and shorter time to market, T&M’s major advantage over Fixed Price is the continuous delivery of a software solution. Testing is conducted at the end of each iteration; every sprint is designed to deliver value (be it a specification, prototype or ready-to-deploy app component) to the customer.

Software Development Pricing Models & How They Relate to Project Management Methodologies

Dedicated Team

The Dedicated Team approach is basically a variation of the T&M model. By going DDT, you get an extension of your in-house IT department: you are 100% free to manage your remote employees directly, monitor the development process, hold meetings on a regular basis, prioritize tasks on the scope, etc. However, you must provide the agreed workload (160 man-hours a month per person) to all members of your team, which might not prove a realistic (and cost-effective) alternative to T&M in the long run.

Having said that, the DDT approach offers some major benefits:

  • Your remote team spends 100% of their working time on your project and, therefore, develops a deeper understanding of your product. As a result, dedicated teams are 20% productive;
  • Recent studies show that developers who work on a project together for some time tend to make 19% less coding mistakes, which results in increased product quality;
  • Dedicated teams are 30% more likely to stick to the estimated budget and deliver software on time.
So, which one of these software project management methodologies/development pricing models is right for your business? It depends on several factors, and the size of a software project is surely not one of them. You may address a Drupal development services company to build a business website (which, logically, should be a Fixed Price contract) and end up making a hundred change requests related to UI/UX design. There are seemingly complex projects which involve IoT technologies or integrations with new or close source APIs; yet, a customer has tech background and a SRS up his sleeve, so going FP still makes sense. Don’t jump to conclusions; address a reliable vendor and take the time to analyze project requirements instead!
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