Fixed Price or Time & Material?

Seven / Blog / Fixed Price or Time & Material?

This is a choice that constantly worries almost all potential customers. Although, the same things apply to every situation. Please look at the examples below to understand how Customers imagine these two pricing models and what they associate them with:

Oftenly, Customers intend to lock in the cost to get a guarantee that the Budget at Completion of the software will not exceed the planned figures.

In most cases, Сustomers focus on the minimum figure and fear that software development costs will exceed this or meet the maximum or even more.

Our experience shows that a Fixed Price is a psychologically more acceptable way to set the cost for our clients. However, while this is logical, it requires many appropriate prerequisites to establish a fixed cost of software product development.

A few facts from practice

The thing is that during the software development, absolutely all Product Owners go through several stages of their product perception. Everything starts from the moment of initial awareness of the end-user’s needs during Project Discovery to the final user interface and a Clickable Software Prototype. The vision and understanding of the software functionality at the initial stages often radically differ from what we see at the final step. We call this software product evolution.
This is a completely natural process, accompanied by numerous changes and modifications that require funds. Also, this is inevitable in case you want to launch good software.

Also, a similar process takes place on the technical team side.

The technical implementation of complex or innovative features, modules, or options at the beginning of coding may differ from the final version: some source code is changed, optimized, simplified, adapted, or improved. The software architecture and the server infrastructure are also being improved. It is also accompanied by time and, accordingly, financial changes.

However, the most important thing is that all these actions aim to improve the software product and obtain the maximum positive feedback from the target audience after the software product launch.

The process looks approximately like this:

So, How to fix a Price?

Theoretically, the price can be fixed by applying certain statistical indicators. Are there reliable statistics that would give us an understanding of the budget percentage that goes to this? In general, yes. They range from 21 to 139% (based on our internal statistic). Obviously, their range is so broad that it is impossible to apply it to calculate the budget of each project as a constant because they are very dependent on a considerable number of related factors. This includes:

  • Technical complexity and technological novelty of the software product
  • Qualifications of the team and the number of senior engineers in it with 7-10+ years of experience
  • The amount of functionality, the implementation of which has technical complexity and requires the search for solutions
  • Product Owner’s industry experience and their level of awareness in the field
  • Availability and accuracy of requirements for the software
  • Product Owner involvement rate and communication effectiveness with the Development Team
  • Other related to the end users’ needs understanding and Launching Strategy vision based on that

Accordingly, there is a need to make assumptions for every project, determine the coefficient and set limits individually, which may not always be objective. At the same time, the established Fixed Price may be less lucrative than Time & Material.

That’s when it’s handy to set the cost according to the principle of Time & Material because it allows you to set a range of acceptable time from minimum to maximum for each task. Thus, for the task, hours are provided for an acceptable number of edits, changes, improvements, and corrections within adequate practice-confirmed statistics according to the qualifications of the software engineers. But, of course, the MAX indicator also includes labor costs for finding solutions and some potential deviations in the implementation of functionality initiated by the Customer or its revision as needed. At the same time, control over labor costs is always easily established with the help of time trackers and activity monitoring on the engineer’s monitor. This always gives confidence to the Customers.

When Fixed Price is definitely recommended:

  • If, before the software development starts, you have created a Clickable Software Prototype, which contains highly detailed edge cases, alternative and negative user flows, and not only successful ones
  • If you ran several rounds of user testing using a Clickable Software Prototype and collected focus group feedback, and factored it into the final Software Prototype (thereby preventing a significant number of potential changes making a project budget maximum predictable)
  • If all requirements for each module, option, or feature are collected and documented
  • If there won’t be any changes and additions made during the work

Note: If the scope of the software makes separating Requirements Gathering and Clickable Prototype development extremely time-consuming or impractical in market conditions, then Time & Material is the best solution.

Practically, neither Fixed price nor Time & Material cannot be designated as a cheaper or more expensive option since there are slightly different factors that can benefit one principle or the other.