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Software development outsourcing models: pricing

Published on 
July 16, 2020
Danil Vilkhovskiy

The choice between different software development outsourcing models touches not only financial questions. In other words, this is not only about pricing. It touches also such aspects as project management, control, and versatility in terms of changing project scope as the whole. In this post, we explain the difference between the three pricing models in IT managed services:

  • Fixed-price
  • Time and material
  • Dedicated development team (DDT)

Fixed-price model

The fixed-price pricing model means the exact cost of a software development project is predetermined. That is to say, a vendor estimates in advance how much he will charge for the project to complete and you know the exact price before you enter a contract.

This is the most desired pricing model for those who need clear price points. However, the model is not as straightforward as it is mistakably considered to be. So, let’s give it special attention.

The surface

The fixed-price model is simple for you as a customer. However, you need to define the project scope clearly in advance. In other words, you preliminarily run business analysis (BA) to understand the exact needs the solution should cover and requirements it should meet. BA results in a detailed software development specification for the project and includes all its features, technology stack, quality metrics, etc. A company you apply with your outsourced IT project assesses its scope and quotes it with its price.

Deep insight

Of course, a fixed price is very appealing to your budget policy. But don’t let it be the only thing you know about the model. Here are some other important details for you to be aware of, so you can make an informed decision and understand it pitfalls and your options within a fixed-price contract:

  1. The model does allow alterations and improvements. For example, adding new features to the final build. Yes, even with a fixed-price model you have this flexibility. However, you will have to protocol these contract amendments. That is to say, all the changes are possible but made through additional agreements to the main contract. So, be prepared it may increase decision and execution time. And be prepared to pay for these alterations.
  2. The model does not provide you any control over the project pipeline. You just hand over the project and just get the result. In other words, you can’t control the process (who, when, how, and how long code and test the program). Your only option here is to control the quality of the delivered result.

Time and material model

The time and material model means you engage an IT outsourcing company for their managed services on a “when-actually-employed” basis. Here, you pay for the hours your outsourcing developers actually spend on your project.

The surface

The time and material model is great to use in agile software development. That is to say, when it is impossible to assess all the requirements the ever-changing business environment poses on the project. When it is impossible to identify all the features software should have. At last, when it is impossible to guarantee the requirements and, thus, features of the solution will not change during project execution. To conclude, when there is no rationale in project scope assessment once and for all.

Deep insight

Though providing you with great flexibility in terms of changing and improving the final build value, this model is still kinda “to avoid” for many customers. The reason here is it demands a lot of trust in the vendor’s reliability and his commitment to your goals.

  1. The risks of manipulations by the developers who work on your project. Definitely, this may be one of the main frustrations for you. The fear a vendor may report more hours than they actually spent. As well as the fear they may spend these hours ineffectively. However, there is a perfect remedy to avoid this. Here we are talking about challenges and other trials you may ask developers to complete to verify their skills. This way you get a clear idea about their proficiency, velocity, and general performance.
  2. The model gives you more control over the project execution. Yes, we left this aspect last. Not because it is the icing on the cake but because it follows smoothly from the previous bullet point. With trials to verify the proficiency, you can preliminary assess your outsourcing software developers’ KPIs and control it during your project execution. Besides, sprints reviews and reports helps you a lot in this task. Hence, you can control not only the quality of the deliverables but over the project pipeline as well.

Dedicated development team model

The dedicated development team (DDT) model means your vendor builds a team regarding your project needs and assigns them to your project on a full-time basis. While it is your vendor’s responsibility to payroll them, actually, it is you who pay them on a monthly rate.

The surface

The DDT model is great when you have a project of a large scope in a highly variable business environment and long duration. From this point of view, the model resembles a T&M model but here you get developers to use their skills on a full-time basis. As if you would employ your in-house developers.

Deep insight

Often, this IT outsourcing model is associated with a long-term T&A model. However, this is not true. Here are the factors that make DDT stand apart from T&M:

  1. You take full control over the team selection process. Your vendor suggests and helps you interview and test a candidate. But it is you who make the final decision about whether to include this engineer into the team or not.
  2. A risk of the changeling is not your case. You know exactly who is working on your project. Thus, a DDT model guarantees your vendor does not change the developer without your preliminary permission.

Instead of summary

As it always happens, there is no “right-for-all-the-cases” model. A fixed-price contract is great for a small project but can be a nightmare for large ones. A time and material contract is great for a large project but still doesn’t provide great control over the project pipeline. A dedicated development team contract provides this control but irrational for small projects. So, selecting an outsourcing contract model is always answering the “What is your exact case, and what do you want to get?” question.