Fixed bid vs. Hourly Rate: Software Development Costs

Working with an external software development partner is one of the most effective ways to build a web application. Quite often, young startup founders and company owners are unsure about which contract model to choose. The two most popular pricing models are fixed price and hourly rate, referred to as time and materials (T&M). Which one should you choose, and why can it be difficult to decide? Let’s find out below.

Fixed bid agreement: pros and cons

The fixed-bid agreement is billed as a flat, specified amount of money regardless of the number of hours used. It’s defined and approved before the work starts. Like everything in life, it has both advantages and disadvantages.

Pros:

• Foreseeable costs: if you have a detailed specification of your web development project, the price of developers’ work is constant (find out how to draw one up here).
• Predictable deadline: once the contract is signed, there are agreed terms regarding the time that the project is delivered. Including tests and deployment, your web application is live when confirmed.
• No additional fees: you won’t pay more than what is outlined in the contract

Cons:

• No flexibility: very often, during the development stage, new ideas or solutions may arise that can be implemented much quicker and more efficiently. Unfortunately, once two sides have approved the fixed-bid project, no additional changes outside the scope can be made.
• No involvement: this can be both a good and bad thing. On one hand, you don’t have to worry about the project because it will be delivered at a scheduled time and within budget. However, you are also not able to make any changes to the scope, suggest what should be worked on, or dictate the terms.
• No quality control – when your timeline and budget is set, you need to remember that the provider has to meet these requirements. Hence, their focus is to finish the project on time and within the budget, rather than necessarily focusing on quality. Although you’ll be checking in daily, some comprehensive bugs may occur. This usually happens when the code is written beforehand by another developer or agency.

T&M contract: pros and cons

A time and materials contract is an agreement under which the client pays only for time and resources spent on a project. This supports the agile software development process.

Pros:

• Transparency: you’re informed about everything. Once you sign the papers, there are no secrets about time entries or stages of the project. You can quickly check and change the approach if you need to.
• Costs control: you’re the boss! You decide whether developers should continue working on the project or not and how many hours they should spend. Daily stand-ups and weekly reports help you see the progress.
• Flexibility: when working on a new and unpredictable project, it is common to make decisions during the project whenever a strategy changes, user feedback is different than expected, or there are other (sometimes better and more comfortable) ways to develop the product. This can make it easier to manage the scope of work.
• Relationship: when working on T&M, you need to be involved in the project to control the process. Some people think of this as a disadvantage, but not necessarily. An hourly rate helps you participate in building your product 100% and dictate the terms. Thanks to this, the relationship between you and the team becomes binding.

Cons:

• No predictable deadline: there is no exact time that the project will be delivered. It may be estimated to take two months, for example, but the scope is often likely to change and the deadline is variable over time.
• Uncertain final budget: before the project starts, you can’t be sure about the overall costs. Due to many changes and unforeseen decisions, the final cost can end up being more than expected.

How to choose the right billing strategy

So what should you choose when you’re working on your startup development project?

If you are certain about the specification of your product and sure the scope of work is fixed and unchangeable, then it’s easy to estimate the ballpark cost and pay the fixed bid. On the other hand, when you’re working on software that is likely to change in direction or the way it’s built, then T&M is the way to go.

The most crucial aspect is that a development team will focus on quality with the T&M contract, as any value additions can be incorporated into the scope. Fixed bid, on the other hand, requires them to concentrate on the deadline and take care of the costs.

Remember, no contract will be 100% perfect. But when you find a trustworthy partner, you won’t need to worry about all these tiny details, as long as you can compromise and work together.