Software Development Pricing Models: Which One to Choose

What determines software development costs?

The size of the project

Project type

  • 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.

Platform

Types of software development pricing models

Fixed-price

Pros of a fixed-price model

  • 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

  • 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?

When to use

  • 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.

Time and materials

Pros of a time and materials model

  • 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

  • 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?

When to use

  • 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.

Dedicated team

Pros of a dedicated team model

  • 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

  • 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 to use

  • 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

Conclusion: How can you choose the right software development pricing model?

  • The scale of the project
  • Desired features
  • Available budget
  • Deadlines
  • Required team composition
  • Level of control you want to have

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A team of engineers writing about web & mobile applications, here’s how we think (https://yellow.systems/blog) and live (www.instagram.com/yellow.systems/)

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