When a customer hires a software development company, they sign a billing contract. The pricing model used depends on the project. The main models are fixed-price, time & materials, and milestone. In this article, we look at the advantages and disadvantages of these pricing models and tell you which is best to use when.
What is the fixed-price model?
A fixed-price contract is based on an estimate of the amount of work that needs to be done. Project requirements need to be written to define this scope of work. Wireframes also need to be created to help the development team figure out the hours necessary to implement all features. With a fixed-price project, the service provider and the customer both carry some scope-related risk. Any extra work (when clients want to add a totally new feature that was not specified in the documentation) usually goes under an additional agreement. In this case, the client must pay extra.
In this model, it’s important to discuss everything before the actual development in order to estimate the cost of the software product. The fixed-price model ensures that a project is done and delivered within a specific timeframe and budget.
Advantages
Finalized pricing. After the contract is signed, the client knows the budget. The company cannot overcharge without notice.
Strict deadlines. When the customer understands what features they want in an app, the developers can come up with a clear plan and definite deadlines. Everybody knows what work will be done at any given point in time.
Predictability. When everything has been discussed and planned beforehand, it’s easy to monitor the status of software development and predict if the work will be completed on time.
Little to no management. All project details are defined in the contract, so project management can be passed down to the project manager. No excessive supervision is required on the part of the client.
Disadvantages
Rigid terms. After the project starts, it cannot be adjusted during the course of implementation. If market conditions change and some planned feature is no longer needed or a new feature is needed, it’s impossible to accommodate that. Implementation of this new feature has to be negotiated independently. With fixed-price projects, the paperwork and approval of new features takes much longer and can potentially stall the whole development process.
Long planning. A fixed-price contract demands in-depth planning. Developers need to discuss every detail and every action along with possible pitfalls.
Miscommunication risks. There’s always a risk that miscommunication may lead to delivering a product that doesn’t exactly correspond with what the client hoped for. Such misunderstandings can happen because the project specifications aren’t clear. Lack of project monitoring can also cause miscommunication, especially when developers need confirmation or feedback on the work that must be done. If the client is working with an offshore company, they need to know how to manage a remote team to avoid project stagnation.
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