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Fixed Price Contract for Agile Software Development: Pros and Cons

Fixed Price or Price & Material – find out which cooperation model suits your project better?

There are two major pricing models and partnership contracts in software development outsourcing: fixed price and time & material model. The choice is not always obvious, and if you have doubts about which model to choose for your software development project, we are going to discuss the fixed price model, its merits, drawbacks, and see where and when to opt for that model. If you are not familiar with the fixed price model or are not sure whether it fits your particular project, you will find all the information and answers you need here. 

What Is a Fixed Price Model?

A fixed price software development agreement is a kind of cooperation between a customer and vendor in which everything is set and determined beforehand – all the requirements, schedule, scope of the project, and costs are established without any additional clarifications or changes being added throughout the development process. So, you have everything figured out, all the requirements are clear, the timeline is determined, and the budget is set. In that case, you can just pay your vendor once and be over with all the bureaucracy. This model is rather straightforward, so it might seem like the obvious choice to many companies.

However, it’s not that simple. The model is not universal, and it has a number of advantages as well as disadvantages, which is why you need to consider all of them to make the right choice and select a model that suits your unique business and requirements. Let us first take a look at what a typical fixed price project is and what preparations you’d need to make before you can start.

Short-Term Projects

Fixed price software development projects are short, somewhere around 2 to 3 months in total. Within that timeframe, developers can create a demo for your future app, a basic MVP, or add new features to the already existing solution. It is rather unlikely that your team will be able to create a fully functional large-scale solution within that time frame, which is why you should not count on that. 

If you are just planning to create an application and want a solid demo or minimal value product (MVP) sample for it, this might just be the right pricing model for you. However, you need to have a precise list of specifications for that product your vendor would have to follow to a tee, only then you and your vendor will be able to determine the fixed cost of the entire project.

Before You Start

Before you contact your potential vendor and start negotiating the price of the project, you must have three essential things on your hands: project specifications with a detailed description of all the requirements, application mockup with implementation-ready UI and UX design, and acceptance criteria that will be used to test the product after it is ready. All three are essential because otherwise you and your vendor would not be able to determine the exact price of the project. Without clear requirements and specifications, the project’s scope might change, which means changes in the time and effort put in it, and subsequently, changes in the price.

Advantages of Fixed Price Model

So, you have all the requirements and specifications set and are ready to hop on that new project with your vendor. At this point, you might want to consider all the pros and cons of the fixed price model. Your money and your product are at the stake, so you would surely want to evaluate all the possibilities.

Gradual Progress

Throughout the development process, there will be certain milestones your software development partner is going to achieve, and at each of those milestones, your partner will show you a new build with new features. The team will present the new features and improvements on a regular basis giving you the opportunity to monitor the delivery of the project. That way, you will be as engaged in the process as you need and stay on top of the delivery timeline. The final milestone will be devoted to testing and polishing the product.

Predictability

If you partner with a professional team of developers, you can be sure you get exactly what you pay for. This cooperation model is rather predictable and if you opt for the fixed price contract software development, you can be almost 100% sure of the end result. Of course, for the results to be totally predictable, you need to partner with a reliable vendor with a trackable record of success in delivering similar projects. 

Transparency

You negotiate the price and from that point on you know where the project is going. More so, you have a clear deadline that is quite helpful for more efficient business planning. It is also much easier to manage as you will be able to observe the development progress throughout its milestones. The developers will have to report back to you on a regular basis which promotes transparent and open cooperation between you and your vendor. 

Disadvantages of Fixed Price Model

There’s nothing perfect in this world, and the fixed price has its flaws too. This model would not be a good choice for a long-term project whose specs are not clearly defined.

Long Planning Phase

To give you a precise cost of the project’s delivery, the vendor needs to know everything about it – all the specs, requirements, UI and UX mockup, and a template for testing – all of these things are essential for giving you the exact figure. That is why the planning and preparation stage might take weeks and months of your time. Whether you plan all the features and specs on your own or with your vendor’s help, it will take a considerable chunk of your delivery timeline just to get all the things in the right place. 

Lack of Flexibility

Once all the requirements and specs are set, you cannot really change anything; the developers will proceed with the plan and develop the exact product you’ve paid for. Let’s say your market changes and you now need to adapt to these changes halfway through the project. Well, now you are stuck with the app you’ve paid for. The only way to change the scope of the project and add new features to it is to file a Change Request and renegotiate the price and all the details of the project. This would cause additional delays.

Fixed Price vs Time and Material Model

The Time & Material, sometimes referred to as the cost-plus model, is the second type of cooperation between you and your vendor, often juxtaposed to the fixed price model. In a nutshell, this model is used when some or all the requirements and specs are unknown prior to the project’s kickoff, which means that the scope of the project might change throughout the development process. Obviously, this means that the cost of partnership with the vendor would change too, so you cannot really put a price tag here. 

The name of the model suggests that the price is defined by the time and material spent throughout the development process. Though you can make estimations and together with your vendor determine the approximate software development outsourcing cost, the final figure will be determined once the project is all but finished. 

With the basics out of the way, which model suits your project better? That would depend on several factors you should consider to make the right choice. Here’s our checklist for choosing between time and material vs fixed price.

Managerial Control

With a fixed price you’ll be getting regular reports on the progress upon achieving predetermined milestones. However, you will not be able to intervene in the development directly or make any real changes to the process. With a time and material model, though, you can get as much control and agency in the project as you want. You can even participate in the development directly, add new people, make changes to the team composition, and manage the entire progress hands-on.

Flexibility

The fixed price model offers little to no flexibility. Once the price is determined and the work has started, it’s too late to change the course. Basically, there’s no such thing as fixed price contract agile software development, as it is quite challenging to implement any changes here. The time and material model, on the other hand, offers much more flexibility, allowing you to change the project’s specs on the go and adapt to the sudden market changes that might affect your business.

Kickoff Speed

Fixed price is great if you do not have all the specs and requirements as well as the UI and UX mockup in place already; it will take you weeks and even months to kick the project off. Planning and preparation for such a project might even take more time than the development process itself. With time and material model, you can start working on your project in a matter of a couple of weeks, and with a good development partner at your side, you’ll be seeing tangible results within a month.

Development Speed

The fixed price model fits small projects like developing an MVP or adding new features to the existing apps, so it might take just a couple of months to get it done. Time and material model would take more time as the development might stretch to many months because of the sheer scale of the project. 

Transparency

One of the best things about fixed price is that it is rather transparent; you know exactly what you sign up for and where your money goes. No hidden catches, no charges, no surprises – everything just goes according to plan. Assuming you work with a reliable and honest partner, the time and material model is also rather transparent. A good vendor will always give you all the vital information on the project’s progress, the time spent working on it, and all the expenses. Here, all you need to worry about is having a truly honest partner.

Your Involvement

Fixed price approach inherently implies less work for the client. You may only contact your team once in a while to check on the milestones and that’s it. With time and material models, on the other hand, you can choose your degree of involvement. If you are a hands-on manager, you can stay in touch with your team at most times and even participate in the development, and if you want to focus on other tasks, you can leave your development team and just check on them from time to time. 

Final Thoughts

CriteriaFixed PriceTime & Material
BudgetWhen you have a fixed budget to work with.You can afford more budget flexibility.
Development speedWhen you need things done fast.When you can take your time with project delivery.
Project scaleFor small projects with few requirements.For complex projects whose specs and objectives might change over time.
Managerial involvementWhen you want to leave most of the managerial control to your software development partner.If you prefer a more hands-on approach and want to work closely with the team.
Management techniquesFor using standard project management techniques like the Waterfall model.For more agile project management.

Comparing cost-plus vs fixed price model, the conclusion is simple – each model is good for different types of projects. If we use a small-scale project like adding a couple of new features to the existing app as an example, a fixed price would be a clear winner; however, if we talk about a large-scale project with numerous variables, time and material would be the best choice. It all depends on how well you know the scope of your project and your own requirements. 

With a fixed price, you do not have to worry about the hourly rates and all that stuff, just pay the money and wait for the final delivery. With the time and material model, everything can change as you go, so you’d have to be more involved in the process.

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