Software Development Pricing Models: Fixed Cost VS Hourly Rate VS Dedicated Teams

Outsourcing your software and mobile app development projects to a remote operating team demands a lot of brainstorming, research and decision making. The process of software development is infused with risk potential and cost-related considerations. Hence, before you set off on the journey, it is important to first mull over what business engagement model would work best in given circumstances.

To extract the maximum value from vendor-client relationship, choosing the right pricing model (cooperation model) is essential. Being versed in building high-quality software and apps, Spaculus approaches each project with unique perspective.

In this write-up, we are going to help you make an informed decision by discussing what each engagement model means to your business.

Fixed Price Model

Fixed Price Model, as the name suggests, has pre-defined elements of budget, requirements and scheduled tasks. You and your technology partner commits to a fixed cost under this price model. You are obligated to pay the price post delivery of the project which is independent of the project timeline and resources invested by the vendor.

Fixed price model is suitable for short-term project with limited requirements and transparency of clear goals and expectations and lucid working process. This kind of plan also works best while doing business with a new partner who still needs to prove their skills.

Merits

• Precise and quick achievement of goals due to complete clarity on requirements and specification
• Timely delivery of projects with pre-defined development process and deadlines
• Dependable transparency of development process gained with minimum supervision

Drawbacks

• Big chunk of your time and budget is spent on requirement analysis and product definition process
• Due to limited flexibility, fixed model also imposes severe challenges of estimates if experienced abrupt changes or addition in requirements
• Time and budget constraints might affect the project quality
• The possibility of developers overestimating the price is high in favor of unknown future risks, which results in elevated project cost
• Not suitable for ambitious, time-consuming projects where the scope is thick with advanced challenges.

Fixed price models are therefore thought for projects with well-defined, clear deliverables and practicable deadlines.

Dedicated Team (Agile) Models

Dedicated Team Models, also functioning as Agile models, consist of a remote team of developers hired exclusively to work on a given project. Usually considered for a long-term, Dedicated Team Models are quite straightforward and organized, and easier to manage for timelines, communication practices and budget criteria. This approach has you paying a fixed monthly fee which is mainly subject to the team size. The total fee in this model includes developers’ salaries, vendor’s charges and other administration expenses.

Merits

• Seemingly better than a fixed price model
• Clear budget promises
• Flexible project scope
• Great control on working team, timeline and development processes
• Complete dedication from Developers
• Exclusive team focus on your business specifics and project knowledge

Drawbacks

• Not recommended for short-term, small-scope projects that can be completed within 3 months
• Tedious team management may require you to hire a dedicated project manager to mitigate the challenges

Dedicated Team model is ideal for long-term projects and offers many perks such as budget control, flexibility of scope, team management and timelines. For long-term projects, the model Agile model is quite efficient

Hourly rate Model

Usually, many software development projects are now turning to Hourly rate model especially when the projects have long-term commitment and contains a lot of unknown challenges to come in future. In projects of this kind, fixed price models will fail to deliver desired results and create a lot of struggle during the development process. Even startup companies gravitate towards the hourly rate concept for the following reasons:

Great flexibility

Fixed price model come with easy decision making since the clarity needed on specifications is there in the beginning phase. However, the changes with fixed price is impractical and expensive. In hourly rate model, team members can freely tweak and alter the course of the project when required.

Better Risk management

Fixed price mode does not comfort you much when it comes to maintaining the risk potential of the project. It lacks the firm assurance that emerges from accurate estimations. Furthermore, the commitment made to the technology partner within a fixed price contract may not work well for bigger projects. Also, tracking progress appears feasible only when you are to get deliverables post a clarified milestone. The risk potential on your part thus increases. This is not the case in hourly rate model.

Economy

Since fixed price model involves the calculation of forecast risks and overhead, you don’t always end up getting the economical charges for prolonged projects. In the absence of fixed cost processes, you save a lot of money and extract best from their experience. Hourly rate models do not egg on you unnecessary cost of non-required features, pitfalls and imagined failures.

Contractual simplicity and agility

Hourly rate model offers you great simplicity in legal contracts and straightforward and brief contracts. Since priorities remain flexible, you can find it easy to change with the conditions proposed by the client and start doing more important things as agreed by both parties without a burden of renegotiation.

The bottom line

We have discussed the pros and cons of different pricing models for software development projects. What cooperation model you should select depends on specification and nature of the project and client’s comfort level. Every model has its perks that are prone to the working condition and resources involved. You can pick the one that aligns best with your business structure and final outcome.