Fixed Price vs Time and Materials: which software pricing contract is right for you? | Mood Up team - software house

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Fixed Price vs Time and Materials: which software pricing contract is right for you?

 

The cost of development is always an important consideration when looking tohire a software development partner, and rightfully so. Such partnerships can be built on either fixed prices or contracts where the client is charged for the time and materials needed for the development. Making a decision on which one to opt for however depends but are not limited to factors such as requirements, budget, quality of work and the date in which the product needs to be delivered to the client.

Read onto to find out whether your business needs fixed or time and materials pricing for its software development.

What is a fixed price contract?

Fixed Price contracts as the name implies are software contracts whose deliverables and prices are agreed upon before starting work . Such projects involve intense questioning and probing of the client’s ideas and requirements to ensure the software house has a very clear idea of the end product. Wireframes can be extremely useful here as it will help visualise the end product. The software house then does some scoping inside itself to evaluate the technologies , designers, developers and other resources that must be deployed to deliver on the requirements expected from the client. The client is then presented with the scope of the work that is required to create the product, a plan for the development of the product, a deadline and its fixed cost.

What advantages does a fixed price contract bring you?

1. Helps with budget allocations – Having a fixed price for the deliverables can help clients allocate a set budget for it and not worry about it increasing. Any charges over the agreed amount must be notified of in advance and agreed to by both parties.

2. Requires little client involvement – Fixed price software contracts require very little involvement from the client as the deliverables are agreed by all parties well in advance. Such contracts are ideal for clients who have little technical knowledge, little time and/or prefer a hands-off approach to working with their outsourcing partners.

3. Predictability – Clients that need to plan a budget for development costs can benefit from fixed-price contracts as they are fixed and predictable. Such contracts allow the client to have a birds view of the development as it happens and makes reporting easy.

4. Fixed deadlines – Fixed price contracts provide clients with fixed deadlines that the software house will need to meet. Any inability to meet the same can have the software house incurring financial penalties.

What disadvantages do fixed contracts have?

1. Marked up prices –Fixed price contracts tend to be costly as software houses mark up their development costs to cover any development work that might be outside the scope of work agreed in the contract.

2. Rigid scope with no possibility of changes –  Fixed price contracts make no room for adding new functionalities or any change in scope. This is detrimental as the customer requirements today change rapidly, and might have the client receiving a product that is redundant.

3. Long planning sessions –  Agreeing on the scope of fixed-price contracts is a tedious affair as all requirements and deliverables have to be planned well in advance. This takes an inordinate amount of time, pushing the development time further.

4. Quality assurance issues –  Instances of software houses delivering products with substandard code with little testing to meet the stringent deadlines set by fixed-price contracts aren’t unheard of.

5. Miscommunication between teams – Misunderstood project requirements can have the developers doing a sizable of work that will end up being of no use. This risk of miscommunication is very real when the cultural differences between the client and software house are rather large (yet, another reason why Mood Up prefersnearshoring).

What is a time and materials pricing contract?

As you might have guessed Time And Materials contracts charge for the actual work that is done(agile pricing) against the more rigid one-time payment required of in fixed-price contracts. Such software development is accomplished by scoping the project requirements with the client, accessing the work required and then dividing the work intosprints(components). The client is then informed of the number of hours and materials that would be required to build each sprint of the project. Such an approach to pricing software development lets the client be in charge of the development and have a birds-eye view of development as it happens.

What are the advantages of a time and materials contract?

1. Better control of costs –Time and materials software contracts give clients better control over the development costs as they are usually charged on a per sprint basis. Such an approach to software development is best for clients who prefer to see what they are paying for as it is being developed.

2. More flexibility to change requirements –The ability to pay only for the work done allows clients to add and/or modify the requirements from their software product, at any time of their choosing. This is important as the market and customer requirements might change, thereby requiring new/modifiedfunctionalities.

3. Less time scoping, more time developing – Time and Materials based software products work towards building a minimum viable product (MVP) first and then making iterative improvements to it. Development work, therefore, can start immediately without the need to spend days pouring over requirements as with fixed contracts.

4. Transparency throughout the project – The client is informed of the work hours and materials that is required for development, along with the hourly rates before every sprint. Such transparency allows for better cooperation between the development house and the client.

5. Ability to terminate the partnership at any given time – Time and materials pricing contracts allow clients to pull out of contracts at a time of their choosing as the charges are by sprints. Such a pricing approach tends to be useful if the quality of work from the developers do not match client expectations.

What are the disadvantages of a time and materials contract?

1. Requires more client involvement – Time and materials software contracts requireclients to play a lead role in managing the development of the product. Clients tasks in such an approach to development can have the client creating, managing the product backlog, attending weekly reviews on the state of development and product demos.

2. Costs can escalate with more functionalities – The ability to add/modifyfunctionalitiescan have your product being more costly than it was budgeted for. This, however, should not pose much of an issue as the client can always terminate a contract should the cost become too excessive.

3. Uncertain deadlines due to changing requirements – Any changes in project requirements can push the deadline of the product back and delay the release of your product to the market.

So which should you choose?

Both software pricing approaches have their pros and cons which is why we recommend our clients to opt for one that best suits their development and business needs.

Fixed price contracts are ideal for when the software that is required is of limited functionalities, for a set purpose that will not change anytime soon and has a very strict budget. Such an approach to development should only be taken if the product is akin to a MVP and has a strict delivery deadline.

We at Mood Up prefer the time and materials approach to software development, as it matches our agile design and development principles. Such an approach we’ve found is ideal as it is impossible for both us and the client to have a concrete idea of the end product before starting its development. The flexibility offered by this pricing approach allows our clients to add new functionalities and ensure the end product is relevant and not redundant as with a product delivered at the end of one long fixed-price development cycle.

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