Vitaliy Kononenko

CTO at Computools

The global outsourcing market keeps growing. In 2019, it was valued at $92.5 billion, and by the end of 2020, this figure is expected to hit $132.9 billion. The demand for IT consulting services continues to grow. The most popular types of software services are mobile app development and web development, which allows businesses to move online and improve their customer service and sales volume. Computools provides both these software development services, as well as creates a variety of other digital products, using the latest technologies. To learn more about it, contact the expert team.

Whatever the service, software development rates vary from company to company. It depends on their location, level of expertise, and tech stack. Another huge factor affecting the cost of a specific product is the type of pricing model you use in the contract. The most popular models are the fixed price and the hourly rate.

Let’s look at each pricing option, highlighting its benefits and drawbacks to a potential client.

FIXED PRICE VS HOURLY RATE PRICING MODELS

What is the fixed price model?

The fixed-bid agreement specifies the scope of work and the amount of time required to provide a software development solution. These accurate estimates determine the price that cannot be changed once the project starts off. This pricing model is best-fit for small and medium-sized projects that have a short timeline and strict deadlines.

Pros

· Projected expenditure. The price is constant and determined in the contract. The project specification outlines project development stages, delivery date, and the overall cost. The project budget cannot be changed once the agreement is in force.

· Foreseeable deadline. The product’s functionality is discussed before the agreement is made. Thus, the client knows all the essential information about the software design, namely deployment, testing, and release beforehand. All this remains unchangeable during the project implementation.

· No extra fees. If some part of the project takes more time to complete, the contractor cannot charge extra money regardless of the amount of time spent de facto. The client pays a fixed price that is agreed upon before the start of the project.

Cons

· Lack of flexibility. Should you have any suggestions or changes to be made in the project during its implementation, it will be impossible to put it into practice.

· Less quality control. The focus in the fixed-bid agreement is put more on finishing the scope of work by the target date rather than making sure that the product’s quality is above reproach. It does not mean that you will get imperfect software. It says that the engineering team is concerned about delivering it on time and unlikely to have time for improvement if needed.

Choosing between fixed price vs hourly rate, one should remember that the fixed-price model works better for short-term projects that have clear requirements and a limited budget. The risk here is tied to the client’s inability to alter the project’s requirements once the dev team embarks on coding as well as the impossibility to influence the project development process. So, the contractee should be extremely careful in their choice of an IT service provider as the product’s success is only a result of the developer’s professionalism and software engineering effort.

What is the hourly rate model?

The hourly-rate agreement, also called the time and materials (T&M) contract, does not set a constant price but determines a rate for every hour the dev team uses to work on your project. This type of agreement is well suited to the Agile framework as both allow for extreme flexibility in project development. Under the hourly-rate agreement, the contractee does not know the amount of time and resources that will be needed to design the software as it is difficult to provide accurate estimates before the project starts.

Pros

· Transparency. The client keeps track of the project progress and is informed of all the changes made at every stage of project development.

· Involvement. The contractee collaborates with the team and takes part in the software development process, thus being able to make sure the product complies with their vision and business needs.

· Cost control. The engineering team can improve the solution architecture throughout the project development. It may reduce the project’s overall price as the dev team will put less effort to deliver the same good result.

· Flexibility. Since the project scope is unclear at the beginning of software design, the contractee is free to alter the product’s functionality and introduce new features at the stage of deployment.

Cons

· Uncertain deadline. The client is capable of changing the scope on the go, but each significant change puts off the delivery date. The more new features will be added, the longer the project development will take.

· Undefined budget. The project cost result from the contractee’s requirements and wants. The final price of the digital product can be determined in later stages. For this reason, budget planning may be complicated in this type of contract.

The main advantage of the fixed price over the hourly rate is that the client knows how much it will cost and when it will be released and put into operation. However, not every case of using the fixed-rate model is beneficial to the client when it comes to cost savings. Some developers tend to charge 30%-40% more than the software design services cost in a bid to protect themselves if anything in the project development process goes wrong. By contrast, the hourly rate is always followed by uncertainty about the final deadline and the project budget. At the same time, it allows the contractee to modify the product’s features and choose the best software development strategy in terms of tech stack.

How to choose the right strategy?

The best project price is neither a software development hourly rate nor a fixed bid. The choice of the pricing model stems from your business needs. If you have a fixed vision of your digital product and clearly know what it takes to design it, the fix-bid agreement will help you receiver your custom software quickly and in accordance with your requirements. But if you have not shaped your product vision and would like to enhance it throughout its implementation, the hourly-rate contract will be a reasonable option in this case.