In the software development industry, there are mainly two pricing models used when coming to custom software development services: Fixed Price Agreement and Time & Material Agreement. Both models have their advantages and disadvantages, and the final decision regarding which type of contract to use when creating custom software should consider which one fits best the specific customer’s project.
Fixed Price Agreement can be used if there are clear requirements and complete specifications, allowing the software development company providing the services for implementing the product to estimate the total cost without considerable risks for either the customer or the vendor. The client should be able to share his clear and complete vision about the product to be implemented with the software developers in order to ensure correct results.
Time & Material Agreement assumes that the development process length is not exactly known when the contract starts and that the project planning is flexible. It may seem right now that using this pricing model you are not in control of what and when is implemented. In fact, with this type of contract, the customer is able to better control the outcome of his project, and also the investment made for it. This type of contract is working very well with agile software development methodology, which enables adaptive planning, evolutionary development, early delivery and continuous improvement and it encourages rapid and flexible response to change. So, the customer will be able to change the priority of the features needed to be implemented while the implementation of the product is already in progress, and also, he will be able to add new features or remove some features if he realizes that the scope of the project has changed.
Let’s also take a comparative look at the advantages and disadvantages of each pricing model:
Fixed Price advantages:
Having clear deadlines related to the cost of each feature being implemented is a big advantage for any company or individual that seeks to develop a product. However, this type of planning is possible without major risks for both the customer and the vendor for small projects, and if this type of planning is used for projects bigger that 3 months it usually results in costs being increased exponentially with the effort, while the risks are increasing exponentially.
With a complete set of specified requirements and prearranged deadlines, there will be no surprises.
While everything is already in place regarding the project scope, the development of the product requires minimum participation from the customer’s side.
Fixed Price disadvantages:
Having a contract for a specific set of requirements will not allow any changes to be made to the project scope without changing the contract. This means that the customer and the vendor have to agree a new contact regarding the project development for each change the customer wants for his product. This is the main weak point of the Fixed Price agreements and it can be overcome adopting the flexible Time & Material model.
Time & Material advantages:
This type of contract allows changes to be done to the project scope without the necessity for the customer and vendor to agree a new contact.
In case of an emergency, the customer won’t have time to go through a negotiation process for the effort needed, as they need someone as soon as possible. Time & material contracts allow easy integration of emergency situations in the terms of existing contract.
This type of agreement allows the developers to analyze in depth only the features that are next to be implemented, and not the entire set of requirements (some of which even the customer does not know for sure they will be implemented, while the project scope might change until then). This means that the software development team can save time and start the creating the actual product.
Time & Material disadvantages:
The customer does not know the exact budget he needs for the final product to be finished, but he does have a rough estimate regarding the budget. The Time & Material agreements assume that the vendor will give for each feature a rough estimate, allowing the customer to have an idea about the costs.
Continuous implication of the customer in requirements analysis is important in the success of product implementation.
Before deciding regarding what contract type would be appropriate for a software project, the customer should weigh all the advantages and disadvantages mentioned before in the context of his or her project.
If you cannot choose between these models, please request a free quote from FIT Software and we will provide all needed recommendations for your project.