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Software Development Pricing Models Compared

Before starting the engagement, the client has to choose a software project pricing model which usually depends on many factors: the project scope, timeline, project requirements, and the way the cost is calculated.

Fixed Price, Time and Material, and Dedicated Team are the most popular software development pricing models, however, the naming can change from company to company.

In this article we will compare three classic software development pricing models, to help you choose the one that will maximize the benefits of your collaboration with a software development company.

Popular Pricing Models in the IT Industry

Fixed-Price Pricing Model

software development business model

A fixed cost pricing model is a model that guarantees a fixed budget for the project, regardless of the time and expenditures. The requirements, specifications, and schedules should be clearly specified before the beginning of the project development. Due to the well-defined specifications, the customer can rest assured that they’ll get exactly what they need, and due to the deadlines set in advance, the client ensures that the project is completed on time.

Advantages

  • The client knows the budget after the contract is signed. The development company can’t overcharge without notice.
  • The developers can suggest a clear plan and definite deadline when the customer knows what functionality he  wants to have in the software. The client knows what work will be completed at any given point in time.
  • It is easy to track the status of software development when everything has been discussed and scheduled beforehand. Therefore, it is easier for the client to predict whether the work will be done on time.
  • Since all details are specified in the contract, the customer doesn’t have to supervise project completion and can pass it on to a Project Manager.

Disadvantages

  • Any time the client wants to add some changes into the project scope, a new amendment (change for request) should be negotiated and signed. This will inevitably prolong the time-to-market for the product.
  • If the development team suggests an interesting new feature or solution that would bring great business value but would take additional time, there would probably be no extra time or budget to implement it.
  • The fixed-price model requires thorough planning. Developers need to discuss every feature and every action in detail.
  • There is always a possibility that miscommunication can result in a product that doesn’t exactly meet the demand of the client. Such misunderstanding can occur because the requirements of the project weren’t clearly defined at the beginning. Miscommunication may also be caused by a lack of project monitoring, especially when developers need clarification or feedback on the work they have done.

When to Use a Fixed-Price Price Model

  • For small and short-term projects or MVP that last a few months.
  • A customer has all the necessary documentation for the project, including technical specifications (SRS), a well-developed plan, workflows, wireframes, user journey maps, and user stories. In fact, it will also take a lot of time to prepare these documents.
  • A customer is sure that the project’s requirements won’t change in the future.
  • A customer doesn’t want to be actively involved in the development process and prefers to discuss everything in advance and then delegate the entire project to the development team.
  • A client wants to check the capabilities of the software development company before hiring them for a larger project.

Time & Materials Pricing Model

billing models in it industry

In the time and material model, a customer pays for the actual number of hours spent on their project plus the expenses related to the development of their software if needed (like additional equipment). The development team provides rough estimates on the time, scope, but they are approximate and can change both sides. The main benefit of this model is that it allows the customer to start the development of their project right away, change the requirements during the development process, and does not require any contract changes. In addition to that, the client will be able to see the results of all the development stages and continuously track the team’s progress. This increases the chance that they’ll get the exact solution they’ve expected.

Advantages

  • The development work is usually conducted on Agile methodology and is broken down into short sprints. Features may be added or removed to meet the needs of the client. The customer has a direct impact on how the product will work and how it will look like. As there are no strict limitations in terms of budget and timeframe, developers can  provide recommendations and share ideas on how to improve the product.
  • The client pays only for the time developers spend on his project tasks.
  • The development process is very transparent. The client can track the project progress once the developers add updates on the work completed.
  • As soon as the contract is signed, the development process starts. Therefore, no time is lost in preparing huge requirements that may change in the course of development.
  • The workflow includes all meetings and discussions as part of the development process. Therefore, it won’t require expenses related to the project’s arrangement at an early stage.

Disadvantages

  • The final release can be delayed because of multiple revisions which are common practice in software development, so the project may become overdue.
  • As the time frame for creating and implementing features is flexible, the development company names an approximate price, so the client doesn’t know exactly how much money in total he will have to pay.
  • Market conditions are unpredictable, and at some point of development, it can become obvious that some of the originally designed features are no longer relevant. In this case, the client has to act quickly to change the development process to better fit the market demand.

When to Use a Time and Material Pricing Model

  • There’s no set scope of work and it’s difficult to figure out all of the final requirements right at the beginning of the development process.
  • The goal is to build a large project lasting more than two months.
  • Project specifications are missing and requirements are constantly changing.
  • A client doesn’t have a tight project deadline.
  • The customer wants to begin development as soon as possible.
  • The client wants to keep control over the development process and the budget.

Dedicated Team Pricing Model

billing models in it industry

When hiring a dedicated