Fixed price meaning in software development
The article is a part of Code Inspiration’s software development outsourcing Knowledge Base.
Working for 10+ years in the B2B segment, I have been a company representative who was responsible for finding outsourcing professional to serve our company’s needs and to monitor the projects to be performed on time and within the budget, the company accepted for that functionality. At the moment I am working as a part of outsourcing agency Code Inspiration, daily communicating with clients and selecting the most convenient type of cooperation for them.
Brief description of models of work and comparison of Fixed Price, Time, and Material options will help you to understand which one is applicable for your business. Tips for entrepreneurs, who decided to move on with Fixed price would help them to avoid risks and potential timeless and additional expenses in the future.
When it comes to hiring an outsourcing development team or starting a project with a local development company, one of the most important points to be agreed on is the model of work.
Software development models of work
At the moment, there are 4 mostly used models of work applied internationally. Let’s list all of them: 
- Time and Material: Bills are generated after sprint completion according to the number of hours actually spent on the project.
- Dedicated team: The customer pays monthly per team after approving the team composition.
- Outstaffing: This model is very similar to the dedicated team model, with one difference, instead of the team, the company should pay monthly, or weekly for the developer.
- Fixed price: This model of work is supposed to be the main topic of the article.
The general description of this model is considered to be the following. The scope of work is fully described in the specification guide and approved by the stakeholders. The scope of work and functionality is not going to be changed. The ways of implementation, if there are any options of how this or that functionality might be implemented, are already discussed as well. Usually, the project description contains a prototype with the final design or at least very detailed mock-ups of screens.
That is to say, the project has the final approved scope of work. The development company provides the estimation to the customer, indicating the calendar timeline of completion and the full budget.
Fixed price model benefits
Getting back to our initial question, when to select a fixed price model for your project:
The fixed priсe model provides you with the ability to plan the budget and to do your marketing plan. I would say that stability is the main plus of this model. As well, it provides the possibility to the customer not to get into too many details, simply waiting for the completion of the project.
However, I couldn’t but mention that recently, I have noticed that the fixed price model of work is losing its popularity and more and more clients get to the Time and Material option instead. The main reason why is: most of the projects are developed using agile, after completion of the first or second iteration, or after usability testing, it is common that the customer notices that some functionality is not required or should be modified, however, according to the fixed-price contract all amendments are possible to be done only after full completion and approval of the project. This leads to the necessity to redo some functionality, and if the functionality, which the client decided to modify lays in the initial the architecture of the project – this leads to the time loss in regard to development efforts, as well as enlarges the budget for the development.
In regard to the MVPs, where the functionality is pretty simple, and the main aim of the software is only to be shown to potential investors – fixed price is a great option. Stability, which this model provides you with, saves you from the risk to exceed the budget, and while the development is in progress – you can use your time scheduling important meetings or plan visiting events where you will be able to show your MVP.
Speaking about larger projects, it is important to keep in mind that living in a world of constant changes, there are lots of situations and conditions which might make you change your mind during the development. In this case, the Time and the Material option would be a better solution. Having 2-3 weeks iterations, you will be always capable of changing the scope of work, reprioritize tasks, and improve the software efficiently after usability testing or according to the investor’s requirements.
Fixed price model tips
Decided to select a Fixed Price model for your project, check the following tips:
- Make sure the development partner you have selected is able to estimate the project according to the story points of tasks performed on already released projects.
- Ask for the PERT estimation or other sources to see on the basis of which concept the project was estimated.
- Ask to divide the project into iterations, so you don’t get in trouble, discovering in a few months that nothing was done. Ask to perform a ready-made part of the functionality in each iteration to make sure that the development is going according to the schedule.
- Ask your development partner to add you to Jira or any other management tool to see how the tasks are set and monitor the daily process of development.
- Ask for at least a few weeks, or one month of free maintenance after completion. Some bugs are difficult to discover at first glance.
Selecting the right model for your project seems very simple in the very beginning; however, when it comes to practice – selecting the right model can help you to save budget and time or lose it if selected incorrectly. The content of the article was written based on the 100+ projects performed by our outsourcing company.
The article is a part of Code Inspiration’s software development outsourcing Knowledge Base.
