Software Development Pricing Models: Which One to Choose
Without a doubt, software development is complicated. This process consists of many steps, with the exact content varying somewhat depending on specific requirements. Besides the coding itself, the development process also includes elements such as business analysis, architecture, wireframing, design, testing, and many more. It’s no wonder that software development can be quite expensive. Taking into account every significant part of the process, there are several pricing models that you can choose from when discussing your idea with a future partner.
However, software development is an intangible process. It may be hard for someone who deals with it for the first time to understand what exactly they are paying for. To help you understand how the costs of your project are calculated and choose the approach most suitable for your idea, we have prepared this guide on software development pricing models.
What determines software development costs?
Let’s start with defining what exactly the factors are that influence the development costs. It’s quite common for a development team to provide a client with an estimate only to be immediately asked “why is this so expensive?” Here are some of the most important factors to consider when calculating the cost of your software project.
The size of the project
Development costs will vary depending on the scope of tasks you want the team to complete. Small projects are tasks such as minor changes in code or/and design. Medium projects require more work to complete and some examples are creating simple mobile or web apps. Large and enterprise projects include multiple integrations with various third-party services, intensified security requirements, and huge feature sets.
There are four main types of projects clients hire the software development team for.
- Development of new software: Building a brand-new solution from scratch based on your specifications.
- Software improvement: Includes upgrades, bug-fixing, and adding new functionality.
- Integration of software: Introducing ready-made or custom solutions into the existing business processes.
- Web development-building websites and/or web-based products.
For each type, there is a different tech stack, team composition, and delivery time, thus the final costs are different as well.
Another crucial factor is the platform you want your app to be used on. Usually, there are three main options you can choose from: iOS, Android, and web browsers. Note that if you already have an Android app, you cannot simply use the same code for iOS or web apps since all these platforms have different languages, APIs, and SDKs they work with. If you want your software to run on various platforms, you can opt for cross-platform development.
More factors can contribute to the development costs like the team’s location and the seniority of specialists, however, the ones mentioned above have the biggest impact.
Types of software development pricing models
Next, let’s talk about the most common ways software development teams determine prices for their services. Most of the time, you will encounter three main models: fixed price (FP), time and materials (T&M), and dedicated team. They can be mixed if necessary, but usually, teams stick to one preferred model. To pinpoint the difference between fixed price, time and materials, and dedicated team models, here are their detailed descriptions.
What is a fixed-price contract? This is a form of cooperation in which the price for software development is determined solely by development time and cost estimates, which are based on your product’s specific requirements. This means that every metric here (time, release date, working hours, budget) is fixed, so unexpected situations like sick leave or technical delays should be either included in the calculations or eliminated entirely.
Thus, correct planning and thorough project management play a crucial role in fixed-price agreements. To successfully complete this kind of project, the team will need exceptionally well-written requirements that will provide its members with a clear vision of the final product.
Also, risk management becomes quite challenging. There are plenty of situations that are nearly impossible to predict, so you should bear this in mind when signing a fixed-price contract.
Pros of a fixed-price model
The benefits of fixed-price contracts include the following.
- Predetermined budget: You get the total time and fees for the project upfront right at the beginning. No additional fees without prior notice.
- The precise delivery time: Since all deadlines are set in advance, you will know when your product will be ready to enter the market.
- Simple management: The detailed planning and schedule makes the project management easier and lessens the supervision requirements for your side.
- Predictability: Since everything is discussed from the very beginning, it’s easy to monitor whether the project is progressing as planned.
Cons of a fixed-price model
Here are some drawbacks you may face if you choose a fixed-price model.
- Inflexible terms: If the market conditions change or there are new functions to be implemented, the contract cannot be altered right away. You have to discuss each modification separately with your team and then make another agreement, so the paperwork can become extremely voluminous.
- Exhaustive planning: A fixed-price agreement requires substantial planning and risk management. Every detail needs to be thoroughly discussed and this can delay the time to market for your app.
- The risk of miscommunication: It’s possible that during the discussion of your product, some misunderstandings can occur. It can happen when the specifications aren’t clear or the project monitoring isn’t sufficient. As a result, the final product may not look the way you expected it to.
What do you pay for?
With this pricing model, you pay for the exact amount of work that you and your team discussed and put in a contract. The project is done within the specified time and budget. The estimates are not changed in any way during the development.
When to use
There are several project types where a fixed-price model can be efficient.
- Small-scale and short-term projects without a lot of functionality (MVP, PoC).
- Projects where the client is certain that the requirements for the project won’t change in the long run.
- Projects where there is no significant management from the client’s side required, so the project can be fully delegated to the team.
- Projects where the client has extremely strict deadlines and/or a limited budget for the project.
The larger the project is, the more difficult it is for the fixed-price model to work well. In this case, other pricing models can perform better.
Time and materials
The competition “time and materials vs fixed price” is well-known among software development companies. Time and materials (T&M) is the most common alternative to the mixed, fixed price model. Actually, most contracts are based on T&M. What makes this model so popular? Here is the answer.
Unlike the fixed-price model, T&M uses a more flexible agreement. You and the team can discuss changes in the budget, time, and scope of work at any time and then alter the terms of the contract accordingly. For example, say you want to add new features to your app to address more users’ needs. With a T&M agreement, this is simple. Just tell your team what you want to do and they will create an estimate for the task. Once you and the team have agreed upon the terms, they start working on it.
Pros of a time and materials model
The T&M pricing model has the following benefits.
- Flexibility: Time and materials agreements are usually accompanied by adaptable methodology in which the whole development process is split into so-called sprints. This allows for implementing changes fast, including both removing unnecessary features and adding new ones.
- Project control and transparency: You can have a direct impact on the project during the entire development time. In addition, you can always monitor what stage the project is on and how the requirements are met.
- High quality: Since all parts of your future app are thoroughly tested in iterations, the final version comes quite close to perfection.
- Quick start: Sure, planning is an important part of T&M, but it doesn’t take as long as fixed-price, so the development can start sooner after the agreement is signed.
- Minimal risk-bearing: The providers are the one who takes on most of the risks. If you are not satisfied with the quality of their work, you can change the team members to finish the project without additional losses.
Cons of a time and materials model
Nothing is perfect in this world, and the time and materials model is no exception. You should keep the following disadvantages in mind when considering this type of agreement.
- Undefined deadlines: Since the project is reviewed several times and each revision may result in major changes, the release can be postponed for a certain amount of time depending on the number of required changes.
- Undetermined budget: For the same reason as the final deadline, it’s hard to say for sure how much money you will need to spend to complete the project.
- Unstable market: The market is changing all the time. It’s possible that there may no longer be any need for some of the initially planned features at some point in the development process. If this happens, you should notify your team as soon as possible to avoid paying for useless functionality.
What do you pay for?
If you sign a time and materials contract, you will pay for the exact number of hours spent on your project and the exact amount of materials used during the process. Payments are made once in a defined period of time (typically once a month).
When to use
Time and materials pricing models are good for the following types of projects.
- Large-scale projects which include many features.
- Projects where it’s difficult to define the entire scope and you need a hand in finalizing the requirements.
- Projects where a high level of flexibility is required.
- Projects where you have enough budget and no strict deadlines.
- Projects where the development should start as soon as possible.
- Projects where you want to stay in control of the development process.
The last software development pricing model covered in this article is a dedicated team. In this model, you pay for the amount of time your team spent on your project. In addition, team management is completely in the client’s hands. Therefore, the development price is comprised of the team members’ salaries.
It works like this: While you and the software development agency you chose discuss the project and make estimates, the agency sends you the CVs of potential specialists who can carry out the tasks you need. Then, you pay for the team’s work each month.
Pros of a dedicated team model
This model has its own advantages:
- Total control: You are the one who reviews the CVs offered by the development agency, conducts the interviews, chooses the team composition, and decides whether to upscale or downscale it.
- Less administrative work: Working with a dedicated team feels almost like hiring an in-house team, but you are free from duties like handling onboarding, holidays, sick leave, and vacations.
- Project understanding: The team spends all their time on your project only, so they are likely to have a better grasp of it.
Cons of a dedicated team model
However, there are also disadvantages to keep in mind for dedicated teams:
- More management time: Since you are the team’s boss, you will need to invest more of your time to monitor and motivate the team.
- High costs: This model generally turns out to be the most expensive one in comparison with the previous two.
What do you pay for?
When you opt for a dedicated team, you make monthly payments that include the team’s salaries plus a small administrative fee. Both the salaries and the fee are defined in the contract.
When to use
A dedicated team is effective for the following types of projects.
- Projects where you want to influence the development process directly and monitor the team first-hand. This model is perfect for you if you have prior experience in project management.
- Projects where you want to manage the scope of work and budget by yourself during the development, in addition to the team itself.
- Projects where you want to build a team personally and be familiar with the people who will work on your project.
Wrapping it up: Summary infographic
Here is a brief summary of our guide on software development pricing models.
Conclusion: How can you choose the right software development pricing model?
As you can see, all pricing models are worthwhile and can be effective in different situations. The final choice depends on multiple factors such as the following:
- The scale of the project
- Desired features
- Available budget
- Required team composition
- Level of control you want to have
We generally recommend the time and materials model since most of our projects last too long for a fixed price. In addition, it provides us with more flexibility and involvement in the project.
Originally published at https://yellow.systems.