Fixed Pricing Vs Time & Material in Software Development

‍Introduction

When you research software companies to outsource your project, you may come across different names for pricing, with two coming up significantly more than others: the “fixed pricing” model and the “time & material” model. You might be wondering why there are so many types of pricing models and how they differ from one another. 

At Dirox, we advise different contract types depending on many factors relating to the project. If you’re looking to outsource the next project to us, we can consult with you for free on which contract type suits you best. Otherwise, dive into this article to learn about what “fixed pricing” and “time & material” models are in software development.

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Fixed pricing model

This pricing model is effective for most clients if they have a clearly defined scope of work and demands due to their stability and nature. You pay a fixed price that guarantees a fixed budget for the project regardless of time and expense. However, any changes to the project will result in additional charges.

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Advantages of Fixed pricing

One of the main and most liked benefits of the fixed pricing model is that the client can plan the exact budget. But you need to still be careful as additional charges can be costly if you don’t have a precise project scope. Consistency, speed, and low risk are other reasons why clients choose it. You will define the deadline and scope of the project when working with the software outsourcing company, which will guarantee you transparency and well-planned milestones. Minimum client supervision is needed as everything is already established in the beginning which frees up your time. 

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When to choose Fixed pricing?

It is best to choose the fixed pricing models when you want to have a medium-sized project or an MVP completed. If you and your team have completely set the project requirements or don’t have time to meet with the development team, this is the perfect pricing choice as well. When you’re given a specific budget to go on with the project, fixed pricing can help you budget more effectively and faster.

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Time & material model

The name of this pricing model itself suggests the meaning. When you choose to fund your project on a “time & material” basis, it means that you pay the team per the number of hours required to complete your project. You will only know the estimated price for the project in the beginning, so it isn’t perfect for those who have a specific budget or a rigid deadline. It doesn’t mean, however, you should never use this with your project.

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Advantages of Time & Material

Would you be surprised to know that a lot of software development companies are moving away from fixed contracts to solely a time & material model? That is because this model allows clients to be flexible with what they want and come up with new requirements along the way. This model is best for complicated or long-term projects, and with that, usually, the vision of the end product is not clear so maximum flexibility is required. 

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When to choose Time & Material?

You should choose the “time & material model” if you want to pay for time spent only, which is a more effective long-term solution. If you don’t yet know what the scope of the project will be like and want full control over product creation and development, this will be a great choice for your company. However, keep in mind that you will need to be with the development team most of the time to get the project to go in your direction. 

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Other pricing models

While the two mentioned above are amongst the most popular pricing models, there are still many more to choose from. You have probably encountered these in the past but maybe perplexed at how many there are. Let’s list out a few other pricing models used by software development businesses.

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Hybrid pricing model

‍You’ve guessed it! There could be a combination between the two models which is called the hybrid pricing model. It is a cost-effective alternative to the “time & material” model for projects with unclear goals. It allows you to set a fixed price on the estimate and combine the best of both worlds. In short, you will be able to keep your budgets flexible while providing a controlled environment for us! 

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Outstaffing pricing model 

This is when you hand out tasks for experts in a software development company. It is not outsourcing because the project is still yours to complete, but if you’re lacking expertise or capacity to complete tasks in-house, this is the perfect model. It is ideal for clients looking to hire specialists on a short-term basis.

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Build, Operate, Transfer

This model is used to finance large projects, typically infrastructure projects. More can be read about “build, operate, and transfer” contracts (also known as BOT) in this article. 

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Incentive-based pricing concept

This is an add-on to the “fixed pricing” model and “time & material” model to motivate the best developers and partly to compensate for the limitations in the two models mentioned above. This bonus is rewarded to the development team that goes above and beyond compared to what’s promised in the contract.

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Conclusion

The best pricing model depends heavily on the type of project, industry background, and demand. If you are still confused about which contract type suits you best, you are only one call away from having our expert consultants look into your project scope and let you know! No matter what pricing model you end up choosing, our team of professional developers and tech experts hope to exceed your expectations.

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At Dirox, we provide three types of contracts: Fixed Priced Project, Time & Material, and Build, Operate, Transfer. We believe these three pricing models can encapture every type of project that you need us to take on. When you pick any type of contract with us, Dirox can guarantee that we handle your project with proper care, and complete attention to deliver you on time, on budget, on quality, and in transparency.

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Consult with us to learn more about smartsourcing your project to Dirox!

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