Sometimes, buying a ready-made app solution isn’t enough to solve your business needs. Said app may be missing needed features or fail to integrate with existing software. In addition to these common issues with ready-made apps, there are a lot of reasons why you should opt to build a custom application.
When developing an application, companies have two options: use their own forces to set up an in-house department or outsource app development.
When opting to hire an app development company, you will sign a contract and a work order. In terms of pricing, there are several pricing models that development agencies use.
At Orangesoft, we offer two pricing models to choose from:
- Fixed price model
- Time and materials model
The above approaches are the two most widespread pricing models for software development today, and they differ vastly. Each of them has its pros and cons, and we’ve prepared this article to help you make the right choice for your needs.
What Is a Fixed Price Contract?
As it can be inferred from its name, a fixed price contract is a type of contract where a client and a service provider agree on a fixed scope of work, deadlines, and payments. With this model, you don’t have to be a software development professional to set the project scope. At Orangesoft, we can help you identify your pain points and write a detailed project specification, and then we develop cost and time estimates based on those specifications.
Though the scope of work is fixed, new features can still be added to the scope while developing an app. But the implementation of the added features may only occur after the initial agreed-upon scope is completed and would require separate negotiation and payment.
Below are the pros and cons of a fixed price agreement:
Pros of Fixed Price Contracts
Fixed Budget
With a fixed price model, a client knows beforehand how much money it will take to build an app. The total cost of the project is written into the contract and remains fixed.
Fixed Deadlines
A client gets a ready app on the estimated date as the app’s specifications are planned beforehand. Further, knowing the deadline means the client can plan post-launch activities in advance.
Little Management Efforts
All the project features are well-documented so that they can be quickly passed down to the development team without additional involvement from the customer.
Predictable Outcomes
The project result is negotiated and put into the scope upfront so clients know what to expect.
Cons of Fixed Price Contracts
Little Room for Flexibility
As previously mentioned, if the project requirements change during the development process, the client would be additionally charged.
Slow Project Launch
The customer and development team can spend a substantial amount of time planning out the product development roadmap in detail. This process can be a potential drawback when it comes to short deadlines, as it can be time-consuming.
Less Control
As a client, you won’t be able to assess the quality of the code, team members, and skill level of the developers assigned to the project. When using this model, the vendor is fully responsible for team and project management. Nevertheless, it doesn’t mean that you’ll be in the dark about the workflow.
Higher Project Cost
Since a service provider usually considers risks while estimating the project’s price, the final project cost may be higher compared to the time and materials approach.
When Is it Best to Choose Fixed Price Software Development?
- Small projects with basic features that don’t exceed three months of duration
- MVPs with a limited budget that require basic features initially (To learn more about MVPs, read here)
- Projects with tight deadlines and budgets
- Projects with a set of predetermined features
Related: 11 Tips on How to Choose the Best App Development Company
What Is a Time and Materials Contract?
A time and materials (T&M) contract differs significantly from the fixed price approach, where you know a fixed sum before starting your development project. According to a T&M contract, you pay the vendor for work hours, materials, and equipment used while developing your software project. In addition, time and materials contracts are highly flexible, allowing for changes and additional features.
The following approach is beneficial when it’s difficult to estimate how much the project will cost or how long the development will take to complete. A time and material contract has no set deadlines or fixed prices for the project's development.
Pros of the T&M Contract Model
High Flexibility
Due to the usage of the Agile method, it is possible to make instant changes to a project when they are needed. Here, the vendor can take advantage of a product approach to react quickly to users’ feedback and market tendencies (e.g., reprioritizing tasks in the development process, adding or removing features, etc.).
Fast Project Launch
The planning stage is shorter than in a fixed price project as the project’s specifications don’t need to be as detailed, meaning that you can start the work on app development earlier.
More Control over the Project
You’ll be involved in all the development phases, including sprints, iterations, and meetings where you can discuss the progress and decide on the next steps.
Cost-Efficiency
The T&M model does not charge a flat rate. A customer pays a higher rate for senior software developers and a lower for junior ones. Moreover, you can control the amount of time a team spends on a specific task.
Cons of the T&M Contract Model
Uncertain Budget
There are increased chances that the time and materials project will cost more than expected since changes are inevitable when building a software product.
Uncertain Deadlines
T&M contracts allow clients to start a project without a clearly defined scope. However, this also means that requirements will be added during development. Thus, the actual release date can extend beyond the expected deadline.
Requires Deeper Involvement
Even though it seems like a big plus for some, many clients find daily meetings, planning, and reports too time-consuming.
When Is it Best to Use a Time and Materials Contract?
- Large-scale and long-term projects with flexible requirements
- Projects with an unclear scope
Fixed Price vs. Time and Materials – Which Model Should You Choose?
Each cooperation model has its obvious advantages and disadvantages; for example, the flexible nature of the T&M model can cover all the unanticipated overages, but a fixed price budget and deadline can get your product developed on schedule. To help you answer this question, let’s compare these two contract models directly:
Pros | Cons | |
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| Fixed Price |
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| Time and Materials |
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Summing Up
Both cooperation models have their benefits and drawbacks, and each has its use cases. To choose a suitable pricing model, you need to understand your project scope, time, budget, and the level of involvement you want and can afford.
We at Orangesoft have the experience working with both fixed price and time and materials contract models. That's why we consider ourselves competent enough to compare the two pricing models to provide you with our expert option on which is the right model for your project's unique requirements.
Generally, we tend to work with the T&M model. However, if a project requires a different approach, the fixed price contract is viable, too.
If you need help with choosing the right pricing model or want to get an accurate estimate on your project, you can always reach out to our team.
