If the term outsourcing is well-known for you, you must have already read a lot about it. Maybe even in one of our recent articles, where we outline the pros and cons of the in-house and outsourced dedicated development teams. Today we are going to look at the peculiarities of the most popular cooperation /pricing models – fixed price, time and material, and dedicated team.
So, you have decided to delegate the development process to an outsourcing company. Choosing the right pricing model might be baffling. It is a complex procedure and requires quite a lot of time and effort to familiarize oneself with such key points as the scope of work, deadlines, tech description, and, of course, payments.
When choosing the pricing model, it is important to keep in mind that there are no worse or better models, there are ones, that are suitable or not suitable for your project, in other words, you should look for the one, that will bring the most value to your business. Each model has its own drawbacks and strong sides and knowing them will be in hand when making your choice. So, without further ado, let’s start with the most frequently used model.
Fixed price model
Fixed price model is the most efficient for short-time projects with predictable deadlines, up to 6 months. According to this type of agreement, you have to pay a defined amount of money for a particular scope of work done. The sum of payment does not depend on how much time and resources will be spent by an outsourcing company to finish the project.
A fixed price contract cannot be easily modified, that’s why a detailed specification of requirements of your product is necessary before the start of the development. Understanding of all the requirements for both sides, will a benefit during designing a strict roadmap and sticking to it to deliver the product in time. If you would like to make some changes in the project – you can reevaluate the project. You need to organize an additional agreement, to outline unmentioned points of the previous one and reestimate of the price of the contract.
Fixed price agreement does not assume a client’s active participation in the management of the development process workflow. This part is usually the responsibility of the outsourcing the company’s project manager.
Pros of a fixed price model:
- Low risks. Your budget is protected if a project won’t be finished within the earlier agreed timeframe. You pay only when the whole scope of work is completed and meets the requirements. Thus, all the risks are on the outsourcing
- Predictability of expenses. You know the cost for the declared scope of work being done and within what time frame before signing an agreement. The document fixes the terms when a certain milestone should be met. There is an opportunity to reevaluate the project if necessary.
- Clarity. The project requirements and needed documentation are described in detail and prepared in advance.
- No supervision. You don’t have to be involved in communication with developers on a daily basis to control the development process. Outsourcing vendor is interested in the development of the product within an agreed timeframe to avoid financial loss.
Cons of a fixed price model:
- Time-consuming preparation before the project start. This approach requires careful/diligent planning to avoid overpayment and further project reevaluation.
- Less control. Management of the development process is carried out by a team member / meticulous manager on a client’s or on the outsourcing company’s It is a vital prerequisite to have the tasks completed properly in a timely manner.
- Lack of communication. Constant communication between the client and the team is not implied by this cooperation model. You can participate in meetings to the extent you find necessary for the project needs.
A fixed priced cooperation model will suit you the best when:
- You have a detailed specification of your product’s features and an accurate plan with steps how to deliver them.
- The development process has clear deadlines and is expected to be finished within 6 months.
- You can hand over management functions to the outsourcing company.
- You do not have the intention to introduce significant amendments to the product during the development process.
- You start cooperation with a new contractor.