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Software development pricing models you need to know

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Let’s talk about money

Fixed Price vs. Time & Material – which pricing model is better?

What factors influence the cost of the software development process?

Our experience 

Our process of software development outsourcing

Summary

When you decide to outsource your project, you’ll probably meet with two pricing models used by software development companies – Fixed Price and Time and Material model. As they’re influenced by different factors and belong to different approaches, the distinction can be confusing and pose a lot of questions.

In this article, I’m going to clear all the information out. How do these software development pricing models differ? What are their pros and cons? And how to choose the one that will be beneficial for you and compatible with the project management approach? Also, we’re going to tell you why we prefer a Fixed Price contract over Time and Material when collaborating with a client for the first time. Let’s find out which of these two models fits your business.

Let’s talk about money

Two pricing models are used the most by software development companies. These include: 

  • Time & Material – this one is mostly used in Agile project methodologies. In this model, as the project progresses, you pay for the time spent on working on the project. It’s a per hour or day pricing model.
  • Fixed Price – this model assumes that the total budget of the project is approved before development starts. It also ensures that a project is done and delivered within a specific timeframe and budget.

Fixed Price vs. Time & Material – which pricing model is better?

Now that you know the basic definition of these two software development pricing models, let’s focus on their pros and cons.

Fixed Price model

Advantages:

  • Fixed budget – thanks to the Fixed Price model, you know the final cost of the project. The software development company can’t overcharge you without warning.
  • Strict deadlines – this pricing model ensures that you know when you’ll receive the final product because the development team knows how much time they need – the project completion date is set from the start.
  • Predictability – with all the project requirements, technical specifications and core features set beforehand, you know what product you’re going to get. A dedicated team has a clear plan of action, so there will be no surprising changes to the project.

Disadvantages:

  • Strict terms – this applies to both requirements for the application and budget. In some cases, making a definitive estimate or planning all the features for a whole project won’t work. Why? Because of project complexity – if it’s a long one, there’s a slight chance that you predict correctly how your software product is going to look months ahead or whether it is going to fit the market’s needs.
  • Limited flexibility – a Fixed Price is a little bit problematic for a long-term, complicated project that, from the start, requires alterations. However, it might work when you know exactly what you want and have detailed specifications.

Time&Material model

Advantages: 

  • Flexibility – Time & Materials pricing model allows for introducing changes and alterations in the process and in the budget. Thanks to this, a dedicated team can add or remove some features to best fulfill the customer’s needs during project development.
  • Ongoing process – this refers to the fact that there are no restrictions and you can start the work right away. With T&M model, you can change and add new features. No strings attached.
  • Transparency & project monitoring– as it’s a continuous process and you can begin it from scratch, you’re more involved in all of it. Also, you can monitor the process as the team goes on with the entire project.

Disadvantages:

  • Unspecified budget – because of the ongoing decision-making process, you don’t know how much it’s going to cost. No final price here.
  • No specific deadlines – this point also connects to the previous one. There’s no strict deadline; everything is flexible, which may pose some problems for someone who wants to know the release date.

What factors influence the cost of the software development process?

Very often, when people hear the estimate and you think, ‘why is it so pricey?’. For this reason, an IT company will list the project cost and what constitutes this. But for now, we’re going to do it right here.

Internal factors

  • Project scope – depending on how big is your project, the price will fluctuate with it. Usually, the bigger the project, the higher the price. It consists of elements such as research, UX prototypes and mockups, design, development, copyright laws, and many more.
  • Non-development costs – here, you should consider not only the sole development stage but also what comes before and after it, such as testing, maintenance, scaling etc.
  • Deadlines – how quickly do you want to get it? It would be best if you kept in mind that software vendors will count up for this fast delivery of the product.

External factors

  • Vendor’s reputation and size – what’s their position in the market? Is this company well-established? If so, on the one hand, you get an experienced software vendor that will provide you with all the necessary services, while on the other hand, it may be costly due to the reputation and expertise.
  • Market price – this varies from country to country.
  • External libraries and plugins – here, we’re talking about all the necessary elements that improve the project, such as functions, features, etc.

Learn more about what affects the cost of software development from our article.

Our experience 

If you’re looking for a software company with experience in many projects, you’ve got your match. At Gorrion, we provide you with the best solutions for your situation. We try to adapt the price model to the given project to fit you as our business partner and the development team. We strive to always respond to the needs of the given project.

At Gorrion, we care about the transparency of the whole development process. That’s why we’re going to give you feedback on every step of the work. Also, you’ll get a dedicated team with a product owner or project manager who will inform you of the costs and where they come from. In this way, you’re going to have clarity as to what you are paying for, and we’ll be able to adapt the solutions that best suit your needs.

We use both pricing models depending on the situation. When we cooperate with someone for the first time, we build the product on a Fixed Price model. Later on, when our client comes back to us, we switch to Time and Material.

Why do we do it this way? The Fixed Price model simplifies the cooperation due to its orderly manner and sets us off to a better start. It allows us to learn working with each other and develop relations which can turn into long-lasting cooperation. The client knows beforehand what they can expect from us. Thus, later, since they already know how we work and trust us, we can switch to a less formal T&M model and have Agile project execution.

Our process of software development outsourcing

Let me tell you a bit about our model – Fixed Price with a little twist. We encompass all its benefits, including a fixed budget, strict deadlines, clear project specifications and predictability. Plus, it’s also agile since you can make all the necessary changes and get a flexible development team. On top of that, our process remains transparent, and we continue to work efficiently.

In brief, we first do the essential product and then, depending on feedback from tests, we add new parts to meet the market’s needs. Easy, right? And thanks to the static budget, the client knows how much money he has to put into the project from the beginning. Results? The whole operation becomes less stressful for both sides.

Summary

Software cost estimations are tricky as they consist of many factors. Before we become discouraged by the numbers, we should know what these pricing models consist of and how they differ. In this way, we can choose the one that best fits our needs and strategy. With the right company and approach, you’ll reach your business goals and build a product that will bring value to the market.

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