3 Popular Software Development Pricing Models | Comparison for Businesses
What are the different types of software development contracts? How to choose a software development pricing model for your project?
Agnieszka Mroczkowska
Table of contents
Building a new piece of software is more than just writing code. The process consists of tasks such as creating the architecture, analyzing project requirements, creating a design, testing it, and implementing the solution.
Bearing this in mind, business owners looking to build an application should be aware of the different software development pricing models available on the market. That’s how you can choose the best option for your project and maximize the benefits of your collaboration with a software development agency.
In this article, we take a closer look at the three main pricing models together with their variants.
Note that the market is full of variation in this area, with different models, hybrids, or even differences in naming. Also, one model may be realized in different ways in the contracts prepared by software development agencies. That’s why our list is by no means complete. Still, it contains key information about the most widespread and important pricing models in software development today. And this knowledge will be a solid foundation for you to make a conscious decision when choosing the pricing model for your app development.
In this article, we will cover the following types of software development contracts:
Additional variants: Fixed budget, Fixed time, Fixed scope
An additional variant: Milestone pricing model
The model comes in three variants: Offsite, Onsite, Outstaffing contract
Now, let’s take a closer look at each of these models together with the pros and cons of software development contracts.
➡ 1. What is the fixed-price pricing model?
In this model, the development process is adjusted to the cost and time estimates generated on the basis of the project details. The specifications, budget, and the date of delivery are fixed here. The project roadmap is usually established as well, and it contains set deadlines and milestones that work as a payment schedule.
The well-articulated specifications allow you to get exactly what you need, and the deadlines you set in advance, ensure that the project is delivered on time.
However, such a model makes managing risks difficult. Note that in this case, the provider is responsible for the entire management process, so monitoring the project’s progress might be challenging.
What is more, unexpected things may occur during development.
- You’ll encounter difficulties every time you’ll want to change something in the scope. You will have to modify the contract and discuss new terms. This will make your product’s time-to-market longer.
- If there is any difficulty, the team will deal with it anyhow just to deliver the appointed scope on time (because the agency can’t suffer a loss). In this scenario, you can forget about high code quality or a thorough Quality Assurance process. The team is obliged to provide a specific scope on time, so if something comes out to the light in the process, then the quality will be the variable that suffers the most.
- If the team comes up with a great new feature or solution that would give you a significant business value, but which would demand extra time, there will probably be no space for them to share these ideas with you. Because in the fixed-price model, the initial plan needs to be followed precisely.
The above cases make cooperation between you and your software development agency challenging. The potential results?
- It will be difficult for you to make changes
- The team won’t make any helpful suggestions
- The team will work half-heartedly because they can’t use their knowledge and competencies in 100%
- Admittedly, you get the product done exactly how you required it, but it won’t not the best product that you could get
In this scenario, you’re not going to be fully satisfied with the final outcome and its quality.
When to use a fixed-price pricing model
- Your project is small and short-term (lasting less than two months).
- You have all the required documentation for the project – you need all the technical specifications and well-developed plan and workflows, wireframes, user journey maps, and user stories. Naturally, you also need to have plenty of time required for preparing these documents.
- You’re sure that the project’s requirements aren’t going to change in the future.
- You don’t care about you being involved in the development process and having an impact on its course. You prefer to agree on everything in advance and then delegate the entire project to the team.
- You want to work with a new provider – by launching a smaller pilot project, you can check how the company works before hiring them for a larger, long-term project.
What do you pay for?
The fixed-price project is completed within the established budget and terms, so you pay for the exact work that you set out to do, according to the initial estimations.
TIP: It’s key for the contract to state the responsibilities of you and the provider, including information on the deliver data, testing feedback, and quality criteria. Any extra work will usually go under an additional agreement and require you to pay extra.
Additional variants of the fixed price model:
1. a) What is the fixed budget pricing model?
In this model, the budget is fixed, but the time and scope of the project are flexible and can be changed during the development process. The budget dedicated to the project is very limited. That’s why the software development company will focus on building the best possible product for this budget. The team might re-prioritize features and change the project’s scope – but without changing the project’s budget.
When to use a fixed budget pricing model
- You have a very limited budget.
- Your product specifications aren’t fixed, and you allow your project scope and deadline to be flexible – you can optimize the project scope with the team regularly.
What do you pay for?
You pay the amount previously agreed-upon regardless of the project’s scope and date of delivery.
1. b) What is the fixed time pricing model?
The model focuses on the time it takes a team to deliver the product. While the project’s scope and budget are flexible, the time allowed to complete the solution is fixed.
When to use a fixed time pricing model
- Time is the most important factor – and you estimate it to be 2 months maximum. You want to do as much as possible during that period.
- You want to release your product as soon as possible.
- You want the solution to be delivered within the set timeframe.
What do you pay for?
You pay for the actual hours the team spent working on your project during the defined period.
1. c) What is the fixed scope pricing model?
In this model, the project’s scope is absolutely fixed and can’t be changed during the project. However, the team has flexibility in the timeline for delivering the product and the project’s overall budget under your guidance.
When to use a fixed scope pricing model
- You want to get a very specific product – you know exactly what you want.
- The time of delivery and the amount of money are flexible and you can change them with the team on a regular basis.
What do you pay for?
You pay for the team’s working hours required to provide the agreed scope.
➡ 2. What is the time and material pricing model?
In the time and material model, you are charged for the number of hours spent on your project, plus the costs of materials (costs of everything related to the development of your product). In this contract, the time, scope, and budget are estimated but still flexible and agreed upon with clients on a regular basis. Payments are settled within set intervals – for example, every month.
The key advantage of this model is that it allows you to quickly alter the requirements and change the work plan without incurring any high costs. This pricing model is a perfect match for modern Agile methodologies (like the Scrum framework), that development teams use.
Moreover, you’ll be able to see the results of all the stages of development and constantly monitor the work of the team. This boosts the chances of you getting the exact solution you wanted.
The time and material model offers flexibility and shorter time-to-market. But its critical advantage is that it allows Continuous Delivery of a software product. This approach ensures high-quality – our teams test the app at every stage of development.
What’s more, choosing this type of contract, you can flexibly set the direction of app development depending on the users’ feedback, market situation, or opportunities which arise during the development. The T&M model allows both you and the team, to initiate changes. They can make suggestions that will increase the business value of your product, and share their ideas for the best possible outcomes.
When to use a time and material pricing model
- You find it hard to determine all the final requirements of your product right at the beginning.
- Your project specifications and requirements are constantly evolving.
- You don’t have a clearly-defined deadline for the project.
- Your product is complex and will take more than 2 months to create.
- You want to start development as soon as possible.
- You want to have an impact on the project scope and the ability to control the budget.
- You want to be an engaged Product Owner who has a real impact on the application’s development to ensure its success. Get our Free Guide for Product Owners – Drive your Product to Success.
What do you pay for?
In this model, you pay for the actual time the team spends on the development of specific tasks together with the cost of everything they use to deliver your product (e.g.access to a specific tool).
An additional variant of the time&material model:
2. a) What is the Milestone pricing model?
The scope, budget, and time of the project are flexible. The difference is that the customer is billed when a service provider has implemented a specific scope of work over a certain period of time, achieving a predefined milestone. The good thing about this model is that you pay for the actual features the development team delivers and become the person to approve each milestone before work continues.
When to use a Milestone pricing model
- You have a good, trusting relationship with the provider.
- You have an established relationship with the provider that helps to reduce the time required for the acceptance process and the chance of long disputes.
What do you pay for?
In this model, you pay for the development of specific features within a previously defined milestone. The amount directly reflects the time the provider’s team spent on reaching a given milestone.
➡ 3. What is the dedicated team pricing model?
When hiring a dedicated team, you’ll be paying for the time the team members spend on working for you. You are accountable for managing their work. The billing is based on the hourly rates of the developers who are part of the dedicated team. This pricing consists of the monthly salary of all the hired employees, together with extra costs for administrative needs.
The benefit of this approach is that you have a lot of control and can manage the team – for example, to determine the workload. Moreover, the provider should present you with profiles of potential team members and allow you to choose the selection of specialists.
This model is similar to building an in-house team, except that you can enjoy the flexibility to increase/decrease the number of team members. You also don’t have to recruit them and incur costs related to holidays, workplace, administration, etc. Thanks to this, you can flexibly scale your team up or down from month to month (or from day to day – depends on your contract with a provider).
What do you pay for?
The dedicated team pricing consists of the monthly salary of all the hired employees, together with extra costs for administrative needs (called the “management fee”). You usually pay on a monthly basis. The salaries and the fee should be specified in the contract. Based on the composition of the team, you’ll know the monthly cost of your project.
The model comes in three variants:
3. a) What is the offsite dedicated team pricing model?
In the offsite model, the development team works on the premises of your provider, often located in another country.
When to use an offsite dedicated team pricing model
The same situation as in case dedicated team pricing model plus:
- You’re looking to launch a long-term project with unclear requirements.
- You have a large in-house project and want to boost your internal team to deliver a successful product – but you don’t want to hire new full-time employees.
- You’re fine with managing the team remotely.
- You have the required know-how about process management or have a person that could be assigned to this task.
What do you pay for?
Same as the dedicated team pricing model.
3. b) What is the onsite dedicated team pricing model?
The development team works on your premises, closely with your other team members.
When to use an onsite dedicated team pricing model:
- You’re looking to launch a long-term project with unclear requirements.
- You have a large in-house project and want to boost your internal team to deliver a successful product – but you don’t want to hire new full-time employees.
- You want to work with the team in one office, and face-to-face communication is important to you.
What do you pay for?
Same as the dedicated team pricing model.
Please note that in the dedicated team models, the team may come with a project manager assigned to it by the provider. This person will report to you or the person responsible for the project at the organization. It all depends on the terms you agree on.
3. c) What is the outstaffing contract pricing model?
In this variant, you hire a development from an outstaffing supplier which can work at your premises or the provider’s.
You specify the number and qualifications of team members you need, and an outstaffing supplier finds them for you. Once the team is assembled, it works as an in-house team except for the fact that it’s the supplier who handles the administrative issues.
This variant is very similar to dedicated team model. The difference here is that you don’t hire developers from a software house but through an outstaffing supplier.
Note: If you delegate the task of hiring engineers to a software development company, the team might come with a set of processes and workflows that boost the productivity of team members and could apply to your project. An outstaffing provider usually doesn’t offer this.
When to use an outstaffing contract pricing model
- You’re looking to launch a long-term project with unclear requirements.
- You have a large in-house project and want to boost your internal team to deliver a successful product – but you don’t want to hire new full-time employees.
- You’re prepared to manage your team, assign responsibilities, and monitor the work of team members.
- You don’t want to look for a software house, instead, you prefer to use the services of an outstaffing provider who will find specialists for you.
What do you pay for?
Same as the dedicated team pricing model.
How to choose the right contract model for your mobile or web app development – wrap up
All the pricing models presented above come with their specific advantages and drawbacks. Your choice ultimately depends on the needs of your project and your business.
The main selection criteria are:
- your project complexity,
- the size of the team you’re looking to hire,
- your budget size,
- project duration,
- the level of control you expect over the team.
If you think the development process will take more than two months, it doesn’t make sense to look at the fixed-price model and its variations.
At Droids On Roids, we usually work within the time and material pricing model because we implement projects that last longer than two months. Our experience in the market acquired during the last eight years has taught us that this contract is an excellent choice for developing mobile and web applications.
Are you looking for a professional and flexible development team to launch your project? Reach out to our consultants, we help companies like yours choose the most suitable pricing and collaboration models.
About the author
Agnieszka Mroczkowska
Need help in choosing a right contract model for your project?
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Need help in choosing a right contract model for your project?
We would love to talk about your needs and advise you on the best solution.
Write an email or click the button below
