Fixed-Price contract for software development – all you need to know

September 23, 2022
Fixed-price contract

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Two of the most popular contract types are fixed-price and time & materials. In today’s article we will discuss what the fixed-price contract is, what are the pros and cons of it and when to consider this approach. Fixed-price contracts, nowadays, are less common than time and materials but still in use that is why it is important to understand what it brings to the table and if it is a right approach for your project. Let’s dive into the topic!

What is a fixed price type of contract?

A fixed price agreement is a contract where a service provider completes the project within the agreed amount of money and time. The contractor sets a price for the work to be done, regardless of the time and expenses.

Fixed price Pricing Model

This kind of pricing model is the most suitable for small projects with an already defined scope and the requirements that won’t change. Any change during the project development requires additional estimation and additional contract. That’s why to be able to use this pricing model, you need to precisely define the scope of work and technical requirements upfront.

The pros of the fixed-price approach

There are different advantages of the fixed-price pricing model. Let’s check all of them:

Cost & deadlines certainty

One of the biggest advantages of the fixed-price approach is the certainty on the project cost. This pricing model makes you sure about the amount of money you will pay for the project so there is a part of stability – you pay the agreed price and do not need to worry about anything else.

Using fixed-price contracts, you are sure about the deadlines for the deliverables as well. This approach requires a good planning process as each deliverable has to be estimated separately. After the whole process you will probably pay more (we will discuss that in the cons section) but both parties will be aware of the time necessary for completing the feature, milestone and the whole project.

Less control over the project is required

Fixed-price contracts usually come with the managed team where the project manager is included. If you do not want to be involved in the project management part of the development, after you agree on the outcome during the initial planning of the project, you can leave all the decisions to the service provider. You will be involved in the project when it is necessary only.

The cons of the fixed-price approach

There are basic pros of the fixed price contracts such as cost and deadlines certainty but at the same time they bring many cons which we present below:

Higher cost of the project

As the service provider needs to estimate the whole process upfront and no changes in the budget during the development process are possible, the development company needs to foresee each aspect of the project that may cause any issues. That is why a software development company will reserve some percentage of the payment to avoid any risk. For this reason, estimations are usually overstated and with time and materials contract the overall cost could be lower.

Lower quality outcome

On the other hand, if any part of the project is underestimated by the provider, the final results of the project may be of poor quality. Your provider will make sure to deliver on time but due to the shortage on budget, will be forced to save money elsewhere. They will be so focused on a delivery within the budget and time that they won’t be able to give you additional ideas or improvements to the project during the development process or what is even worse, will replace experienced developers with juniors just to be able to manage it. Finally, you end up with lower quality code and product that should be immediately improved (which cost additionally) or the product itself is not well-optimized and you need to bear additional costs (e.g. costs of the infrastructure).

Latter start of the project

As long planning is required beforehand (preparation of list of deliverables, estimations etc.), the start of your project may take a while. If you deal with short deadlines, the fixed-price contract may be a nail to your project coffin.

Less flexibility with the project

Once you agree on deliverables and the amount of money that needs to be paid for them, any change in the project requires a change request. These changes are usually a result of unseen circumstances and add an extra step to the process. That is why they need to be estimated and delivered separately at an additional cost.

Pros and cons of fixed-price model

When should you use fixed-price contracts?

First of all, you can use a fixed price contract when there are clear requirements and deliverables for the project. Also, when you have a determined deadline for a delivery.

Secondly, fixed price contracts are suitable for projects with limited or fixed budgets. What is important, remember that the bigger and the longer the project is, the harder it is to deliver a high quality of it with fixed price contracts. That’s why, this approach will be suitable for MVP projects with a tight deadline or small projects with a limited project scope.

Each time you need to deliver a big, complex solution with multiple deliverables and dependencies, consider a time and materials approach which will give you more flexibility and reliability.

Fixed-Price pricing model summary

The fixed-price contract type has its pros and cons. To decide if it is the right approach for your project you need to be aware of all of them and understand your own expectations and capabilities. A time and materials approach that we will describe in another article, gives much more flexibility during the project development that is why is worth considering.

Also, if you would like to start a cooperation with Appstronauts be aware of the fact that we work in a T&M approach only. That’s why we encourage you to follow our blog and social media to find out about this pricing model as well.

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