One of the greatest parts about acquiring bespoke software is that the process usually requires your close attention throughout most of the stages. You first provide the bespoke software development company with all the necessary information on your vision of the product during requirements gathering and then participate in testing the beta environment during the development stage. Having greater control over the project, you can be certain that the outcome will be exactly as expected. Another thing which you are responsible for is choosing a pricing model. Your choice depends on your requirements and, more importantly, your budget. Most companies offer the two most popular models which are fixed-price and time & material agreements. What are they and which one will work better for you?
What is a fixed-price contract
A fixed-price contract is a single-sum agreement where the software development company completes a project within the agreed sum and the given deadline. Despite what many people think, this pricing model is not always suitable for companies with a limited budget, as many IT projects still fail due to unclear requirements. For the project to succeed, it demands defining all of the expectations upfront and gives you a sharp image of what to expect in return. A fixed-price agreement will fit smaller projects, for example a website design, where you know exactly what you want it to look like.
Advantages of a fixed-price contract
If you can provide the bespoke software development company with a clear vision of the product and specific requirements, you can enjoy the benefits coming from a fixed-price agreement which is:
- budget-friendly – you know the costs at the very beginning of your cooperation, which allows your company to better manage the finances,
- predictable – since the developers know what your vision of the product is, there will be fewer surprises after the software is ready to go live.
Disadvantages of a fixed-price contract
A fixed-price agreement may be beneficial when it comes to budget control, but it limits the possibilities of the developers in return. If you do not know clearly what you want the software to do for you, you will shortly notice this pricing model is:
- inflexible – the software you receive is exactly what you agreed for at the very beginning, which means you cannot change your mind during the development process.
What is a time and material contract
A time and material (T&M) agreement is completely different from a fixed-price contract as it presupposes billing customers for the amount of hours spent on the project along with the costs of necessary materials. Even though the hourly rate of labour is set, it is often difficult to estimate the total cost of the project. However, this pricing model offers you much more flexibility when it comes to adjusting requirements and shifting directions. You then do not need to provide the software development company with a clear vision. It is recommended that a T&M contract is chosen for larger projects, for example a mobile application development, as many unexpected tasks may arise during the development process.
Advantages of a time and material contract
Even though the budget is not fixed, it is highly beneficial and much more productive. If you are not certain of your requirements or you wish to be able to modify the scope in the future, a time and material agreement offers:
- flexibility – you can change and add features during the development process, which helps companies with an unclear vision of their product,
- control – you can constantly follow the progress of the development, which allows you to estimate right away whether the software will meet your needs,
- timing – avoiding the fixed-price bidding process allows the developers to start coding right away. Additionally, you can see exactly how much time is spent on your project.
Disadvantages of a time and material contract
By choosing a T&M model, you gain flexibility and control over the project. At every stage of the development process, you gain a clear insight into what your software looks like. By getting involved in the process yourself, you can be certain it will suit your needs. Unfortunately, at the same time you lose:
- no budget control – since you are charged a set hourly rate of labour, the overall cost may go beyond the estimated budget.
Having experienced with both fixed-price and time & material contracts, we have developed a hybrid of the best characteristics of the two types. We know how dynamic software development is, which is why our model offers flexibility when it comes to changing your requirements during the development process. At the same time, we are aware of the fact that smaller companies may have a limited budget, and for this reason we always provide you with a project cost estimation. This way, you can both gain control over the project and better manage your budget at the same time.