Pricing Models for Custom Software Projects
Pricing options for custom software projects: fixed price and time and materials. Understanding when and why each should be used is key. Let's explore.
As a client, you want to get the best product possible for the budget you have. As an agency, we want to deliver the best product possible for the budget you have. Great, we’re on the same page!
But what is the best pricing approach in order to achieve that?
When it comes to pricing software development projects, there are two main options: fixed price and time and materials. We could say that each model has advantages and disadvantages, but that is actually the wrong way to look at it. The right approach is understanding when and why each model should be used. Let’s dive in!
Time and Materials
A time and materials contract is one where the client pays for the actual time and materials used by the agency to complete the project. The price is based on an hourly rate or a daily rate, and the final cost is determined by the actual time spent and materials used.
T&M model should be used when:
Building a Minimum Viable Product
Building an innovative product
Product should be iterated and tested frequently
The scope of the project is relatively large (+3 months of work)
The scope is flexible
What you get with T&M model:
Flexibility: With T&M model clients have full control over the process, therefore any change to the scope can be accommodated immediately. In fast changing business environments this can be crucial.
Frequent testing: T&M model is a natural choice for Agile methodology, where you get quick deliveries you can regularly put in front of the real users.
Fast iterations: Product can be quickly iterated based on the feedback from the users.
Leveraging the entire team: Your team is actively participating in shaping the product, and that’s not a small advantage considering your team will consist of probably at least 5-6 very smart engineers and product experts.
Fixed Price Option
A fixed price contract is one where the client and the software development agency agree on a set price for the project upfront. The price is based on the project scope, and the agency is responsible for delivering the project within that scope and budget. Key word here is scope.
The scope has to be precise and exhaustive. If we are talking about the scope for the static web page, that is doable. But if we’re talking about a complex web and/or mobile platform, defining precise and exhaustive scope in advance suddenly becomes very challenging.
Fixed price model should be used when:
Building simple, static, presentational website
Building simple web and mobile app with well known, conventional features
Budget is not a problem, but it has to be fixed
Product has well defined and documented functional specifications
No changes to product will be made during the project
What you get with fixed price model:
Budget certainty: With a fixed price contract, the client knows exactly how much they will be paying for the project from the outset. This makes it easier to plan and budget for the project. However, the budget itself will be increased as the agencies add a buffer for all the scope-creep risk they’re taking on.
Limited flexibility: A fixed price contract can be less flexible than a time and materials contract, as changes to the project scope may require a change in the contract terms.
Less collaboration: Since the agency is responsible for delivering the project within the agreed scope, there may be less collaboration and communication between the client and the agency.
More upfront work: With a fixed price contract, more upfront work is required to define the project scope and requirements, which can be time-consuming.
Both Time and Materials and Fixed Price have their place in software development projects.
As a client, if you want to maximize the potential of the agency you’re working with, Time & Materials is a must: with this model you get to leverage your team fully and your team essentially becomes an extension of your company, contributing to the project in the most active way.
Fixed Price model is ideal when the scope is relatively small and can be easily defined upfront. Regardless of which one you go for, Cinnamon will make sure to use your budget in the best way possible and deliver what you’ve paid for and then some.
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