[GUIDE] Software Outsourcing Pricing Models: Fixed Price vs Time-and-Materials vs Dedicated Teams

If you’ve chosen to outsource your project to a remote software development team, the next step is choosing your cooperation model. The right engagement model should be chosen from the very beginning to gain the maximum value from the relationship. At Clarisoft Technologies, we’ve got an experience of over 12 years that allows us to provide our clients a unique approach to each project.

Depending on client’s budget, project requirements, like the most software outsourcing companies, we offer the following cooperation models:

• Fixed price
• Time and material
• Dedicated team

To help you make an informed decision we have prepared a quick and comprehensive guide to the pros and cons of each cooperation model.

Fixed Price Model

As you can guess by its name, the fixed price model relies on a pre-defined budget and schedule. If you commit to this plan, you and your vendor agree on a fixed cost which you will be bound to pay upon the delivery of the product, regardless of the actual project time frame and expenses.

When to use

• When you’ve got a short-term project.
• When you have a full project description with clear goals, working procedures, and expected results.
• When you are working with new contractor; a pilot project with fixed price can be a good test to see if the contractor can become a permanent partner

Pros of fixed priced model

• Working on well-defined specifications allows you to get what you exactly need
• The project is likely to be ready and delivered on time while the development process and deadlines are approved in advance
• The development process is transparent and predictable, requiring minimum supervision from you.

Cons of fixed price model

• The nature of this model implies that you will have to spend almost half of your time & budget on the planning and requirements analysis, and product definition phase
• The development team might overestimate the project on purpose in order to cover all possible risks, so you might end up paying more than it is really worth
• The fixed nature of this model limits flexibility; change is evil in this pricing model – if you need additional requirements o something changes you will require additional estimations
• The quality of the project might suffer due to the time and budget restrictions

All in all, the fixed price project model fits small projects with a clearly defined scope and requirements, that have limited functionality and clear deliverables. It suits short-term cooperation with strict deadlines.

Time-and-Materials Model

Unlike the fixed priced model, the time and materials model is more flexible in terms of both budget and project requirements. In this case, the total cost of the project isn’t defined, and it remains unknown until the project is finished, depending on the time and efforts used to implement it. Although it doesn’t exclude the planning and design phase, this model allows you change the scope and the milestones on the go. Consequently, the cost of the project might differ from the initial estimates.

Pros of time and materials model

• Provides increased flexibility in terms of project requirements, scope and functionality
• It corresponds to a ”pay as you go” approach, which means that you will be billed on a monthly basis for the actual work done during this time

Cons of time and material model

• Because the budget is not fixed, the costs might become uncontrollable and you’ll end up exceeding your budget
• The final deadline remains uncertain, while the time and materials model relies on intermediate releases and small milestones
• Your constant supervision and active involvement are required. It is necessary to keep track of the changing requirements and priorities throughout the process

Consequently, the time and materials model is suited for mid to large projects with dynamic requirements that require ongoing adjustments. Also, this model leaves room for product improvements and technical support.

Dedicated Team Model

In the Dedicated Team Model, you’ve got a remote team of developers working exclusively on your project, on a long-term basis.  You can manage the team or you can charge a project manager to coordinate timelines, budget, and communication process. This approach has a straightforward pricing model: you pay a fixed service fee depending on the size of the team and you are billed on a monthly basis. The advantage is that this fee covers service provider fees, developers’ salaries, and other administrative stuff.

Pros of dedicated team model

• It goes with a fixed budget
• Offers total control over team and processes
• Developers are dedicated solely to your project
• The team has a deep understanding and knowledge of the project and of your business goals
• The project scope is flexible

Cons of dedicated team model

• It is inefficient for a short-term project – if you have a job that takes 2-3 month to complete, investment in a dedicated team can prove unprofitable
• Team management could be difficult if you decide to do it yourself. In most of the cases, you should also work with a project manager

All in all, the dedicated team model is the ideal business model when it comes to long-term project and cooperation. If offers most of all the desired advantages: control over the budget, flexible scope and timeline and control over the entire team. On a long term basis, it proves also very cost efficient. At Clarisoft Technologies, we’ve been practicing this model with success for a long time. If you want to learn more on this topic or you are interested in hiring a dedicated team visit our page.

The bottom line

As you can see, the best cooperation model depends on the particularities and nature of your project. To help you choose the model that suits your business best, we depicted in the table below a synthesis.

To sum up, if you have a dynamic long-term project, which requires constant supervision from a project manager we would recommend the dedicated team model. The fixed priced model works well for a small project or as a trial when choosing a software development company as a partner.

If you are still in doubt whether which model would suit you best you contact us for a free consultation.