App idea documentation- done!
Outsourcing company selection- done!
Project release timeline- decided!
Expenses to be borne by you- ???
Getting an ideal answer to how much your project will cost is impossible. But, it needs to be hammered out from the starting to avoid future conflicts and challenges. There are a few factors such as the company’s operating procedure, goals, and contracted requirements while signing the billing contract that is taken into account to determine how much it will cost to develop the app.
Basically, there are two pricing models – Fixed cost and Hourly rate, which are mostly preferred by service seekers and service providers across the globe. The businesses or individuals who partner with an IT outsourcing service provider spend thousands of dollars to develop the required solution. Here, working on a defined budget is crucial, and reliable IT outsourcing companies provide a better value for your money.
Traditionally, the fixed price model is favored by the companies, but nowadays, the companies are employing an hourly rate (Time-and-material) model to engage with an IT company. Additionally, both pricing models have their own pros and cons, which make the selection of the right pricing contract difficult. It pops up a question- Which is better? Let’s decide!
Hold on! Before looking at the points that help you in finding the perfect fit for your company’s project, let’s first understand the basics of the two models.
Fixed price model
The fixed-price contract adheres where the project scope with detailed features and wireframes are described to the development team in order to figure out the time, resources, and dollars investment that the project will require. It’s a one-time agreement where the development team is abiding to build the app within the agreed sum and any major additional changes in the project scope at the later stage is recommended only with an additional agreement signed. In a nutshell, everything will be fixed with no or very little room for changes.
Hourly rate model
The hourly rate model adheres where the company determines the development cost based on the number of hours of effort the project development requires. Here, the project is developed in parts as sprints and the service provider is paid as the sprint is delivered. Also, the opportunities for the addition or deletion of extra features exist for this pricing model.
Here are the reasons which pricing model to choose alongside when and why elements:
With technology advancements and dynamic market conditions, it’s not mindful to set the project requirements in stone before the app development actually starts. Adapting to the market changes is all-important and that’s where the addition of new features or removal of the planned features becomes vital for the application.
With the fixed-price model, accommodating the changes in the project is completely out of the question due to the rigid terms. Even, if the changes will be considered through extra paperwork, then it eats up a lot of time that results in the features added to the app when they have become outdated.
The hourly-rate based model excels as it provides the flexibility to enhance the project scope at any point of the app development without much less back and forth. In this manner, realigning the goals according to market changes or the user’s feedback enables the businesses to innovate and stay in sync with the latest trends.
The verdict: The hourly-rate model wins for the companies looking for project development with dynamic work scope.
In the fixed pricing model, client involvement is an aspect that varies based on the policies of the service provider and needs to be discussed beforehand. Here there is a risk of not getting the project up to par or not meeting the client’s expectations. Perhaps, the unclear module specification and little information sharing during the development lead to misunderstanding, which results in the poor quality app or not exactly what the client hoped for. If you opt for an experienced service provider you can be assured of the quality they provide.
In hourly-rate based models, the parts of the projects are sent to the clients for approval. In the event, the client requires some changes, then they are reflected in some time and again, the iterated sprint is sent to the client for their approval. The process of continuous testing and multiple iterations guarantees that app developed is impeccable, high-quality, and matches with the client’s expectations.
The verdict: Here, the hourly rate model stands over the fixed price model.
The marketer’s insights state that the possible extensions in the project deadlines mean the project can miss striking the iron when it is hot.
With a fixed price model, when everything discussed and planned beforehand, then it’s easier to predict the deadline for the project and ensure that the app will be developed in a given amount of time. The model adheres to strict deadlines.
This is not the case with the hourly rate model, where implementing the changes in the projects for getting the priorities in order, results in a rescheduling of the final release date. The flexibility of making adjustments becomes a con for this pricing model in the form of delayed deliverables.
The verdict: The fixed-price model beats the hourly rate model.
Did you know? The core reason for the increased need is because –
Digital Transformation is revolutionizing the Businesses
The project management definitely needs an investment of a good amount of time and dollars.
The little to no management in the fixed price model becomes a benefit because every minute project detail is specified in the contract. During contract signing, the project manager of the IT Company is accountable for the project management which reduces the need for any kind of supervision by the client. Here, the management overheads are already included in the project development budget about which the clients are mostly unaware of.
In the hourly rate model, the client continuously tracks the project progress, verify them and request for iterations, if required. The process of regular reporting and interaction will continue for every project sprint, which needs to be managed by the client to ensure high-quality software. The complete control over the project doubles up the client’s responsibility to invest the hours for managing the project.
The verdict: Neutral.
The early fixing of the scope is the only way to make the right estimates for time and price for the app development. But, the further course of actions after the project kicks off plays a key role in determining how much extra the client has to pay.
In the fixed price project, the project scope bound to not creep, it’s a sign the budget finalized at the time of contract sign will remain unchanged until the project is delivered. However, in the instances of the project taking more time than anticipated due to last-minute changes, or the major flaws to be fixed that are out of the scope, the client is liable to pay the overheads.
The clients regularly requesting the changes and addition of new features, then the budget will shoot up. The approximate price can be assured in the beginning, but because of frequent requests for unplanned changes in the project is one of the major reasons for the increase in the cost allocated for the project. In the case of the hourly pricing model, the client can monitor the number of hours invested in the project and will know about the increase in the budget. But as mentioned earlier frequent unplanned changes and the addition of features to the project will always result in exceeding the budget quoted.
The verdict: Comparing both pros and cons of the two models, the budget would be a neutral aspect.
In the fixed-price approach, the client runs the risk of making an accurate long list of requirements initially and committing to the relationship at least to the duration of project development. In the whole process, the client is not allowed to track the project progress, assess deliverables in between, and identify the hours spent on each task. The feeble transparency increases the risk of the project going in the wrong direction and the development of the app that’s not up-to-the-mark.
Under the hourly rate model, when the company raises the invoice, it includes a detailed report of the hours spent on different tasks and materials required. The timesheet must be approved by the client before the company raises the invoice. Also, the client has complete access to the internal development through a project management system that enables continuous tracking of the project progress and can update the team about the changes for the weekly sprints sent. The high level of transparency keeps both the company and client on the same page with zero likelihood of project failure. Here, the client is also required to have good knowledge regarding the project process, the technology, and various process involved.
The verdict: Undeniably, the hourly rate model scores higher on the transparency ladder.
Declaring a winner in the debate of fixed price vs. hourly rate model is not feasible because the market trends, type of use cases, budget, timeline, scalability requirements, client’s involvement, and service provider’s policies defines which pricing model fits best to the project needs. We have already discussed which model performs to the notch from different perspectives. Weigh the strength and weakness of your project type as a client against every element through SWOT analysis to decide which is the best one to opt for hourly rate or fixed price approach. For assistance in selecting the best IT service provider for your needs – fill the form and we’ll suggest the top companies that best suit your requirements. Good luck!