Have you ever heard this from a software development company: 'Dear client we are experiencing some turbulence. Please, fasten your seatbelts'? What to fix, what to fasten and what to lose in order not to hear this phrase from a software development company, which is piloting your project. One of the most sensitive issues is a price. Along with other factors, it can markedly affect the project flow.
In everyday life when it comes to a price, shoppers know it exactly before they are in front of a checkout lane. The same situation can be regarding to a lot of services. Usually, we feel psychologically more secure and confident when know in advance how much this or that will cost. But this approach doesn't work in the same way for all businesses. For such industry as software development, that is not so easy to determine the final budget. This difference is specific to the field. Standing behind checkout lane, you usually know what you buy. Developing a software application, you might not know from the beginning the final work scope or be able to realize that a project flow needs systematic adjustments.
While a client is thinking about a cost, a software development company has to think about a pricing model convenient for both parties. Does a client really need a fixed price or simply want to know a possible minimum and maximum of a budget to evaluate its competitiveness? There are two types of pricing models in the IT industry. Both of them have their own pros and corns. These are fixed pricing model and time & materials model.
So when is it better to fix and when to choose more flexibility?
The idea of a fixed price is that a supplier has to deliver a defined product to a customer at a predetermined price. This approach has its own advantages. It can be considered as an option to go with when a project is small up to one week of work with very well defined requirements and a clear work scope. In a case when a vendor has the similar projects in its portfolio, it also allows to rely on an experience and quote a fixed price.
But this approach implies strong experience and proper application of a risk reserve. Otherwise, it can lead to risk connected with estimation and thus to a serious quality loss. Choosing a fixed price, you have to remember about its disadvantages. This is a lack of flexibility, which means that once a work scope is approved, you do not have any possibility to change the way it develops. Basically, that is a closed book contract. This all is especially risky if that is the first time you collaborate with a company and are not sure about the transparency of all processes.
If you prefer flexibility or simply your project requires regular adjustments, adding new features, prioritizing them, the advice is to go with time and materials. This approach to pricing calculation means that a company charges the client based upon the work performed according to the following standard hourly rates. This approach is highly recommended to use for long-term projects, which last for more than 2 weeks. This will help you to adjust your work scope and influence it every 1 or 2 weeks. The concept of time and materials contract is more client-friendly and focused on the project and its quality. Mainly because of the possibility to prioritize order of features,
The time and materials pricing model has also its disadvantages. For a client that is a risk to go over budget and over timeline. Choosing time and materials model client has to be provided with accessible and transparent tools for tracking time and expenses in order to be fully aware of the process within a project.
What experience do you have regarding price model? Which one do you prefer?