All You Need to Know About Fixed Cost Model for Software Development

A fixed cost model is the most common pricing model found in the market. Many of the software development projects follows a fixed price model for their services. It is simple. A price is quoted for a software project and the development starts if the client agrees to the cost estimation. Finally, the software is delivered and the client pays for it.

What is a fixed cost model for software development?

A fixed price model is a business agreement where the software development company develops and delivers a software project within the agreed time and budget to their client. Here the software development company sets a price for the service irrespective of the time, effort and expense required to complete it. This is a best suited pricing model especially for small projects where project needs and scope are well defined. Here the scope remains fixed and any change to it can lead to additional expenses.

Why businesses choose a fixed price model?

There are a few good reasons that encourage companies to go for a fixed pricing model for their development needs. They are:

Complete budget control

A fixed pricing model offers businesses full control on their budget. They upfront know how much they will be spending on the project. This helps them to manage their finances accordingly.

Control over the development

Businesses can decide what they want to do in the initial phase of development or adjust their scope by getting an estimate of the different features of the software project. This will help them stay within the budget.
Businesses can start the development right away by choosing the hiring model and carry out development in small continuous sections. This can lead them to soon run out of their budget by the time their product development completes. Now in a fixed cost model, businesses will get estimates for even the small modules that are part of the project. Now based on the budget and timeline, they can choose which modules they want to do and then get them done.

Lack of trust on developers

Chances are high that businesses may not have enough trust when working with a potentially new team or new developers or a different development company. This way when they hire a team, they will have no idea how skilled and experienced those developers will be. Due to such lack of trust, it becomes easier for the companies to just go for fixed cost development. Here they will be happy to pay as long as they get the project delivered on time as per their expectation.

Save from research expenses or project uncertainties

Sometimes a lot of uncertainties are involved in software project and businesses have no plan to pay for them. They don’t want to pay continuously over research work or on developing a new feature. So instead of taking up the risks and monetary spending of such unexpected areas, they pass on them to the developers or the development company by paying a fixed cost.

Things to consider when working with a fixed price model

There are a few things to consider when choosing a fixed pricing model for your software development needs and they are:

Have well defined and documented requirements

In a fixed cost project, businesses should invest more on planning and ensure all the requirements are clear and defined. It is important that developers and the client has the clear idea about the requirements and everything is documented in detail.

Start with designing by including all details

It is important to start with the designing phase first once the project scope is finalized. The development team should start by designing the whole project and get it approved from the client. It is the responsibility of the development team to ensure there are no doubts and all the details are included.

Don’t leave anything to ‘Common Sense’. Write down everything

The design of the project should be so clear that there are not any unwritten approaches. The client should pass on all details to the developers and don’t presume that it is common sense to have them included. The client should not make assumption that having a functionality in another app mean the developer will include the same in their app too without them telling. So, it is advisable to write down every single requirement or detail that the client wishes to include in the project.

Expect conflict areas and manage it

There will be always grey areas when developing a software project. This means be ready to have some kind of discussion for changes during the software development phase. In short, always consider some flexibility when laying out the scope of project development and find a way to manage it.

Have a 20-30% contingency budget.

Once the development starts using a fixed cost model, businesses will find something that wasn’t in the scope of the project earlier. Now this is something that the developer or the business didn’t think about before and now has to be included within the project. Keeping such last-minute add-ons in mind, always have a 20-30% of contingency budget in place for such changes even in a fixed cost model.

Risks associated with fixed costing model

Quality compromise

Because of fixed costs for software development, chances are there that development companies might take a shortcut to complete the project by compromising the quality. This happens as developers are more inclined to complete the project within the budget. Again, if the software comes with a good UI/UX then chances are more that nobody will check the backend side too much which again encourages the developers to take some shortcuts.

Cost conflicts

It is not possible for companies to provide all the details of the software project upfront. This means there will be chances of conflicts in the agreement of cost in the fixed price model.

Complicated change management

Managing changes will becomes really complicated in a fixed price model for software development. Even after both parties agrees that it a new requirement, its cost may become the point of debate. This is because the developers may think that such a change is huge while the business may disagree to it. In short, change requests can lead to potential conflicts in terms of its cost and timeline.

To sum it up

Fixed cost model for software development has been followed by many businesses over the years. It has been ideally a quick solution for businesses that have small projects at hand and need to know the budget upfront. Like any other pricing model, there are some pros and cons associated with fixed price model and understanding them will simplify the things for businesses and developers equally.

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