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19.08.2021 | 5 min

When to choose a fixed price model for software development?

The biggest challenge of preparing a fixed price estimation is knowing whether it suits the project or not. Read in the article what criteria you need to take into account deciding about the price model.

When to choose a fixed price model for software development? - 2021 55
Table of Contents
  • What’s the fixed price model, and what are the alternatives?
  • What types of projects are suitable for the fixed price model?
  • How to prepare a project for a fixed-price estimation?
  • How can we help you choose a suitable pricing model?

The simplicity of the fixed-price model is tempting. It’s a very natural, human thing to want to know the prices before you commit to something. However, we often forget that software development is not as straightforward as ordering food, sneakers, or even bathroom renovations. Things can change dynamically. New solutions, technologies, or even legal regulations can completely turn around the project, making the initial estimation completely insufficient. How to make sure that doesn’t happen?

Let’s talk about the fixed price model in software development and how to make it work for you.

What’s the fixed price model, and what are the alternatives?

Fixed price is the most widespread and straightforward pricing model, probably ever since money was invented. In a software context, it means that the client asks for the estimation for a project, and the agency gives the total delivery price. Of course, the price is based on the precise contract called PRD (Product Requirements Document), which includes the scope of work and acceptance criteria.

In order to work for both the client and agency, the development process in this model should be as predictable as possible. Due to its shortcomings and a long track record of waterfall-based, fixed-price project disasters, it’s often considered unsuitable for software development. Due to the immanent aspect of unpredictability, estimations in the fixed price model always include a management reserve, which means they can be even 30% more expensive than with Time&Material.

The pricing model that’s usually much more adequate is T&M (Time and Material). In this model, the client pays for the time that all agency’s team members spend on the project and “material,” which can include costs such as libraries, tools, hosting, etc.

In this case, there’s much more flexibility, transparency, and more freedom to change the project for the client, which results in better software. We elaborate more about this model in the article “Benefits of Time&Materials (T&M) pricing model for software development.”

What types of projects are suitable for the fixed price model?

While T&M is simply the better choice for most projects, there are cases in which the fixed price model is also viable or even necessary due to the fixed budget or corporate rules. Besides enterprises, it’s often the case for publicly funded projects. However, what types can work well in this model?

  • 1/1 copies of apps/websites/platforms
  • Straightforward projects
  • Projects with a precise A-Z specification
  • Desktop to mobile/mobile to desktop development
  • Early-stage/MVP versions with limited features

As you can see, all of the projects mentioned above are relatively predictable. Long story short, if the development process can be primarily outlined, it can be accurately estimated, effectively making it suitable for the fixed price model. The key indicators of an eligible project are limited scope, budget, and relatively low difficulty.

How to make sure your project is suitable for a fixed price estimation?

Before you approach a software development agency with your project, asking for an estimation, you should ask yourself a few questions.

Do you want to be an active participant in the development process? Do you need flexibility in the process?

If the answer is yes, the fixed price model is not for you because it’s heavily dependant on the initial product requirements, and it’s the agency’s role to execute the idea according to the instructions. If you decide to change the direction or add features during the process, it will require a change in the documentation and other estimations.

Are you a startup?

If you are, we would recommend T&M for the same reason as above. For startups, the idea is often still in development, and you have to be ready to react to changes in the dynamic market. So it’s only natural for cutting-edge projects that they are developed in the flexible model.

How big is the project?

It is simple. The bigger the project, the more unpredictable it is. The more unexpected it is, the more expensive it will be to compare it to the T&M model because of the higher management reserve. As long as you care about the cost, it would help if you considered choosing T&M for any project that’s estimated for longer than about four months.

How much time do you have?

Remember that the fixed price estimation process may take much time. If you’re in a hurry, consider choosing the T&M model, in which you can start development almost right away and figure out the details as you go.

How to prepare a project for a fixed-price estimation?

The essential thing you should know about estimations in software development is: “the better you can describe the project, the cheaper it will be.” Simple as that. Here’s a little checklist that can help you get the most accurate (and the cheapest) estimation possible:

  1. Try to describe the final version of the product as precisely as possible. Remember, any changes to the initial documentation will involve extra costs.
  2. List all the necessary features (or at least the minimum package if you’re going for the MVP version).
  3. Prepare design mockups or even final graphics if it’s possible. Knowing exactly how the product should look like will be invaluable for the front-end estimation.
  4. Try to predict all involved costs besides development time. That may include UX, different frameworks, external services, hosting, tools.

How can we help you choose a suitable pricing model?

The biggest challenge of preparing a fixed price estimation is knowing whether it suits the project or not. At some point, adding additional financial cushion is simply unreasonable and dangerous for the project because unpredictability is too high. No money will help if the agency cannot deliver on time. And then, everyone loses.

In our case, we will make a fixed price estimation for you, but we will make sure it’s doable. We will propose another solution if we aren’t convinced that the project can be finished within the estimated budget and deadline.

Fixed price or not, we would love to hear about your idea. So let us know about your project, and together we will figure out the best way to move forward. No matter which price model you choose we want to help with your project