Popular Software Development Pricing Models: Choose the Right One for Your Project
Software development outsourcing has become a lifesaver for many companies that need to build software products but do not have enough in-house resources to develop software. When thinking about outsourcing the development needs to a partner, a company must make a number of important choices, from the right team to the exact range of services needed to complete the project. One of the vital choices to make is the software development pricing model.
This is exactly what we are going to talk about today: what kind of pricing models are out there, which types of projects they fit the most, and how to find a model that best suits the company’s needs. Note that in this article, we are going to talk exclusively about software outsourcing without touching upon outstaffing, which is a different IT service with its own pricing models.
“The decision about pricing model is a very important one to make during the first initiation phase for every product. Still, the model can continuously be adjusted according to business needs, project size, team maturity, budget adjustments, etc. Also, different models can be used for different project phases: MVP, Delivery, Deployment, and Maintenance.”
Why are there different types of software development pricing?
Developing software is a complex process, even when entrusted to a professional software development company. Moreover, there are numerous factors that can impact the cost of a software project, from the project requirements to the specialty and seniority of the people who work on your project.
To make things easier, most software and app development companies offer various product development models. They allow companies and their customers to quickly and accurately calculate the development costs, choosing a model that fits the project specifics, company budget, and the vendor’s available resources. Different software development billing models are designed to fit different types of clients, from small startups to large enterprises.
Why is it important to choose the right pricing model for custom software development?
Choosing a pricing model for a software project is not just an extra step to include in the project roadmap. It’s one of the few ways to ensure that the cooperation between the client and the software development team will prove to be beneficial for both. The client will get to develop a software product with a predictable budget, while the development company will be fairly compensated for its time and resources. The software development agency can provide suggestions on which pricing model works best for the specific project, but ultimately, it’s the client’s choice to make.
Which factors affect the cost of a software development project?
One of the main reasons why companies are going for software development outsourcing is that outsourcing can significantly cut the cost of a software project. However, developing a robust software solution still costs money, so the project budget is definitely something to consider when deciding which pricing model is perfect for you. The cost of custom software development projects is formed by different factors. Here are the most vital factors related to the development project cost:
- Project scope. The larger a software project is, the more human resources and time it will take to develop, and the more the customer will pay for it. The project scope includes everything from the desired functionality and number of compatible platforms to the expenses linked to the integration of third-party services.
- Flexibility of requirements. In the case of smaller projects, the whole development process can usually be planned and predicted down to minor details. Larger projects are more difficult to plan, and new requirements will understandably have an impact on the development cost. Moreover, projects where flexibility is important may not be suited for certain types of pricing models.
- Human resources. The importance of software engineers in a development project needs no explanation: these people are the ones responsible for the quality of the software and the project being completed on time and in full. Considering the aspect of cost, it’s worth mentioning that it’s not just the size of the team that will determine your expenses, but also the specialty and seniority level of its members
- Additional services. There are many more specialists and services involved in the development process besides the developers themselves. If you need the project built from scratch, your team may also need a business analyst, a systems architect, a UI/UX designer, as well as a quality assurance team. Moreover, you may need a team to provide maintenance and support after the project development stage is completed.
- Extra expenses. Depending on the project specifics, you may need to face more expenses to develop the exact software solution you’ve envisioned. For example, when developing medical software, you may need to pay for the licenses or certifications for the team. Plus, if the project requires specific, niche tools for development or testing, you’ll need to add their cost to the overall budget.
Now that you know which factors will account for the cost of your project, let’s take a closer look at the popular pricing models available in the market today.
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Time and material pricing model
Despite being called time and material, the time and material software development model mostly focuses on the time part: as the client, you will pay for the time of the specialists involved in the project. You and the development company will agree on the number and seniority of engineers needed to work on your project, but the requirements have a certain level of flexibility compared to other models. Therefore, there is no exact date when your development project is going to be finished, but you can usually find out the approximate monthly cost of your project in advance by combining the hourly rates of the specialists working on the project, provided that the requirements don’t change dramatically.
“The Time and Material model looks like the more flexible choice for process and scope adjustment. But at the same time, it requires the client’s frequent involvement in budget analysis and feature prioritization. This model is best-suited for use on medium to large projects and custom solutions.”
Pros
- Fast and easy start. The T&M pricing model usually involves specialists the vendor already has available, so the project can be launched quickly and at no extra cost of hiring or onboarding for the client.
- Excellent flexibility. Time and material is possibly the most flexible one among all software development pricing models. The client can cooperate with as many specialists and for as long as needed without making any burdensome commitments. Moreover, the T&M model supports changing product requirements: you can scale your team up and down to better fit your project’s needs.
- Monthly payments. Since the overall cost of the project is not known until its later stages, the client is also not obligated to pay for the whole project in one go. The software development cost in this case is calculated on a monthly basis based on the number of hours each member of the team has spent on the project.
Cons
- Open deadlines. With the time and material software development pricing model, it is virtually impossible to set even a remotely strict project deadline. Because of the nature of the projects that use time and material software development services, where project requirements can be added as the project progresses, calculating the exact deadline is as likely as knowing the exact price of the project.
- Significant involvement. The product owner or another high-level specialist on the client’s side will need to be involved in the software development process day in and day out. This is important because the client needs to make sure that the team follows the initial direction of the project and that the money the client spends on the project goes towards the right development aspects.
- Little control over the budget. You may know the hourly rates of the engineers working on your project, but it can be very hard to control their exact level of involvement in the development process. This is especially vital when your project uses some rare technologies or requires senior-level engineers to regularly contribute to the process. As a result, the initial calculations may be different from the price you end up paying.
When to use
The significant flexibility of time and material compared to other pricing models mentioned in our article makes it the right choice in the following cases:
- Original product idea. When the future project is based on a one-of-a-kind idea, it means the development team does not have enough relevant project experience to make precise calculations when it comes to the budget and deadlines. T&M gives the team and the client just enough flexibility to explore the idea and see where it leads.
- Unclear target market. Product owners often face a situation where they know exactly what kind of product they want to build but are not entirely sure about their target audience. It means that they will need to test different hypotheses to find the perfect product/market fit, and the time and material model gives them just enough room for experiments.
- Desire to control the project. If you put trust in your development team but still have both the desire and the resources to closely monitor the progress of the project, time and material may be just the model to consider. With a reliable team and a gifted product owner at the head of the project, it is definitely possible to reach the anticipated result.
Challenges
- Not a good fit for fixed budgets. For clients with fixed or limited budgets, the open-ended nature of T&M makes it difficult to control the costs. Clients may run out of money before the project is completed, which can lead to two outcomes. First, the product may end up missing some key features that could potentially increase its chances of success in the market. Second, the client may be forced to renegotiate with the vendor and inevitably increase the project budget.
- Administrative overhead. In addition to being directly involved in the development process and making sure the team follows the initially selected direction, the client will also need to monitor the tracking of hours and other resources used. This places an additional strain on the client’s personnel, making them shift the focus from actual work towards administrative tasks.
- Risk of overengineering. Under the T&M model, the developers working on the project will be under pressure to use up all the allotted time. This can lead to overcomplicated engineering decisions and unnecessary features that will only complicate the code and waste valuable resources, as well as create additional challenges with maintenance and scalability in the future.
Dedicated team pricing model
The dedicated team model is one of the most popular models in software development for clients who need to hire an entire development team without facing the usual hurdles and additional expenses of hiring. It’s also often used to enhance the existing team with several engineers with the necessary qualifications. The pricing model of a dedicated team usually includes the specialist’s monthly salary plus extra money charged by the vendor. This model works very simply: the client outlines the number and the required competencies of the people they want to hire; then, the list of possible candidates is typically prepared by software development agencies, so all that is left for the client is to review the list, select the most suitable candidates, and interview them before making the final decision.
“This model is preferable for large and enterprise-level projects. This is a long-term investment that provides opportunities for mentoring, motivation, and growing team loyalty. But at the same time, people management, resource management, onboarding, social package, personal development plan, and salary review usually appear as a part of the process for the client.”
Pros
- Ultimate control. A dedicated team offers the highest level of control among software development pricing models because, essentially, the vendor’s team becomes part of the client’s team, thus participating in every development activity on the client’s side and being able to deliver tasks quickly and efficiently.
- Effective communication. As the dedicated team seamlessly merges with the on-site team, the new members of the team can learn the requirements of project development first-hand. Moreover, by communicating with the in-house team more compared to other pricing models, the dedicated team instantly masters the communication style and can exchange information more efficiently.
- Quick pivot. With a high level of control over the team and finely-tuned communication patterns, a dedicated team can be quickly informed of the necessary changes that need to be made in the project and react to them accordingly. This means that the project can change requirements multiple times without any delays in the execution.
Cons
- Management takes time and resources. Out of all main pricing models, the dedicated team model usually requires the most involvement from the client. You may even need to hire an additional project manager or a person in a similar executive role who will oversee the work of the team, or use the available resources for this purpose — either way, it takes additional time and expenses to effectively manage a dedicated team.
- Paid downtime. With some exceptions, the dedicated team pricing model specifies that the client pays a standard monthly fee for every specialist involved in the project, even if there are no immediate tasks for the specialist to take care of. In some cases, the client ends up paying for the downtime or scrambling for tasks to entrust to the team.
- High costs. Considering the nature of the dedicated team model, and the two cons we’ve listed above, it’s not difficult to guess that this is usually the most expensive model. After all, direct access to experienced talent, full control over the project, and flexibility over project requirements and deadlines are bound to cost money.
When to use
We’ve talked at length about the pros and cons of a dedicated team. But when should you choose a software development dedicated team over the other pricing models? These are the situations where this setup makes the most business sense:
- Your project may change direction. When the scope of the project is unclear and you don’t want to make unnecessary commitments to a fixed team size or deadline, a dedicated team may be exactly what you need, as your team members can quickly pivot the project and execute your vision in the most efficient way possible.
- Create a powerful in-house team. Dedicated team is the development pricing model to choose when you already have an on-site development operation and simply need to strengthen your existing team with a few specialists with the required expertise that may be too difficult or expensive to hire in-house where you are.
- Project management on your side. With some exceptions, the project manager for a dedicated team operates on the client’s side. It gives you more control over the course of development, but also requires additional resources to be spent on your project.
Challenges
- Scope creep. When the project scope expands gradually but continuously, the team risks facing scope creep, especially without a proper change management procedure in place. This can lead to missed deadlines, increasing project costs, and strained relationships between the client and the development team.
- Difficult to scale. As projects inevitably grow in complexity, it becomes more challenging to track and manage costs, especially if there are multiple teams working on the same project simultaneously. This can lead to logistical complications and difficulty maintaining control over the project’s progress.
- Focus on hours instead of value. With the time and material pricing model, there is a risk of the focus shifting from delivering high-value outcomes to billing hours. Prioritizing billable hours can lead to inefficient contributions from the team and stalled innovation, eventually failing to meet project goals in full.
Fixed-cost pricing model
The fixed-cost pricing model is the way almost all software development projects used to work in the early days of IT outsourcing. Under this model, the development team will only start working on the project when there is a clearly defined scope and deadline. With fixed price software development, the client also knows the exact cost of the project from the start and can budget their operations accordingly. The fixed price has some clear advantages — it wouldn’t become as popular as it is in the first place — but also some significant limitations, so it’s important to take a good look at both to make the most informed decision.
“The fixed cost price model requires more time and money for preparing detailed requirements and acceptance criteria for all features. All adjustments must be controlled by Change Management. This model also requires formal approval in case of adjusting the budget, timeline and scope. It’s preferable to use for small to midsize (with defragmentation to milestones) projects and out-of-the-box solutions. Also, a good practice is using fixed price for investigation phases, MVP, and POC.”
Pros
- Predictable budget and deadlines. One of the biggest benefits of the fixed cost pricing model is a combination of clear deadlines and a set budget. In other words, with careful planning, you can know exactly how much your project will take in terms of financial and time resources, and will be able to better outline other steps related to bringing your idea to life.
- Low risk of failure. When a vendor accepts a new fixed price project, they are typically confident that they can complete the work, meaning they have the necessary expertise and the available human resources. This minimizes the risk of the project failing due to miscalculations on the vendor’s side and gives you confidence that your project will be done on time and in full.
- Little to no oversight. The constant control and direct involvement required for the dedicated team model does not work for all clients: if you have a small management team and juggle multiple tasks at once, taking care of another project may be too much to handle. The fixed cost model requires minimal to no oversight on a daily basis, leaving you space to deal with other tasks.
Cons
- Delayed project start. Before the project can begin, there needs to be a lot of calculations both on the client’s and the vendor’s side to set a realistic budget and time frame for the project. This usually means that the project cannot start right away and there is a waiting time for everything to be prepared.
- Little flexibility. Unlike most other types of software development contracts, the fixed-price pricing model barely allows for any flexibility in terms of new features or scaling the project. Any new request needs to undergo the same preparation process as the project itself, and since it doesn’t happen overnight, pivoting the project even slightly can significantly extend the deadline.
- Communication issues. Since the development team under the fixed cost model works mostly independently from the vendor, and with no direct management on the client’s side, maintaining close communication with the team can be challenging. This can lead to your requests taking longer to be fulfilled, and some of them possibly not getting through to the team at all.
When to use
The fixed-price software development pricing model has its disadvantages, but there are also situations where it makes perfect sense for a development project. Here is when you should consider going for fixed price software development.
- Small project with limited requirements. The fixed cost model delivers the best results for small to medium projects without any sophisticated or rare functionality. This can include anything from adding a couple of new features to an existing solution to performing quality assurance on a limited scale after a recent bug fix.
- Limited budget and time. There are many situations where you want your project to be developed as quickly as possible — usually, to beat the competition and release the solution faster. Budget limitations are also perfectly understandable, especially during a global recession, and fixed-cost projects are a way to develop software with a limited budget.
- Startup solution development. There are two reasons startups can benefit from the fixed price model. One, startups often operate under budget and time constraints, and fixed cost projects can be planned to the finest detail. Two, fixed cost pricing works perfectly for building an MVP and seeing if the idea is actually viable.
Challenges
- Potential for misunderstandings. Since the fixed cost development model heavily relies on everything being discussed and decided in advance, it can create some misunderstandings between the team and the client, especially where project specifications, scope, and deliverables are concerned. This means that extra effort should go into ensuring that everyone fully understands and agrees with the goals, timelines, desired outcomes, and more.
- Risk of inaccurate estimations. Estimating the cost of the development project can be difficult even in normal conditions, not to mention the situations where it has to be done from the outset. This poses risks both for the vendor, who can encounter financial losses due to inaccurate estimations, and for the client, who can be discouraged from further cooperation in case of an overestimation.
- Less innovation and more conservatism. When operating on a fixed, and often tight, budget, developers are less likely to suggest innovative solutions due to the fact that they typically take more time to implement and require higher financial investments. As a result, the final product may lack creativity or advanced features that could potentially turn it into a game-changer.
Mixed pricing model
While most software outsourcing companies acknowledge three principal pricing models — time and material, dedicated team, and fixed price — some companies, including ours, distinguish between four pricing models. The fourth pricing model is the mixed, or hybrid model — we also call it the fixed price + model. The “+” in that case stands for extra flexibility: the mixed pricing model is similar to building software using the fixed cost model while having some room for changes with the help of the time and material model. This pricing model shares many of its pros and cons with the two original models that contributed to its formation, but also has some standout advantages and drawbacks.
Pros
- Cost-effective development. Under the mixed pricing model, you can opt out of certain development aspects that are not necessary for your particular project while adding services that are essential for the success of the project. For example, you can opt out of business analysis but request software quality assurance.
- Any level of involvement. The flexibility of the fixed cost + model means you can be as involved as you want in the development project. If you operate under time constraints, you can choose to only review the project when it reaches certain milestones. If you want first-hand, regularly updated knowledge, you can have daily meetings with the team and communicate with the team members via chat.
Cons
- Unclear budget. The adjustable model of the hybrid pricing model means it’s not always possible to know the cost of the project before its start. The more uncertain the project requirements are and the more they are likely to change, the more volatile the end price of the project can be.
- Not always a quick start. While the mixed development model shares a lot of features with the time & material model, a quick start with minimum preparation is not one of them. Before a mixed-model or fixed cost + project can be launched, the vendor and the client need to agree on a variety of things, including the approximate deadline, budget, and project scope.
When to use
- Requirements are likely to change. Similarly to the time and material model, the mixed model is an excellent choice for projects where only some of the requirements are known before the launch. You can then add new features, platforms, and other development aspects as you go and expect fast execution.
- Multiple revisions are needed. In case you have a clear picture of the solution you want to get at the end of the project but not the most defined idea of how to get there, the hybrid pricing model may be the answer to your struggles. It allows you to review the state of the project multiple times along its course and make necessary changes.
- There is a limited time frame. Like fixed price projects, the fixed price + model works best with short-term projects with a fixed deadline. A project lasting for two or three months is where the stakeholders can experience all the benefits of having a set deadline but flexible requirements and a flexible (to a degree) budget.
Challenges
- Complex contract structure. Detailed contracts in software development ensure the overall success of the project and that everyone’s expectations will be met in the end. However, with a hybrid model, contracts can get increasingly complex. The most challenging thing here is to define which aspects of the cooperation may be fixed and which may be flexible, which is something an experienced project manager can help with.
- Managing client expectations. Both fixed cost and T&M models have their fair share of fans thanks to their unique selling points: predictable budget and absolute flexibility, respectively. Mixing the two models can lead to some clients expecting the flexibility of the time and material model on a strict budget of the fixed cost model. The vendor will need to invest extra effort into making sure the client’s expectations are aligned with the actual project specifics.
- Risk of quality trade-offs. In the T&M model, developers typically don’t face significant constraints and can afford to dedicate as much time as possible to polishing the product and making sure that each planned feature is included in the final version. The fixed cost model, on the other hand, requires the team to stay within the deadline and the original budget, which can lead to certain quality sacrifices.
Time and material vs. fixed price model: Which one to go for and when?
The dedicated team model has its uses and is generally a popular choice for a long-term project with flexible goals, but the two most commonly picked models are time and material and fixed price. And while there is a clear difference between the two, first-time customers looking for a partner to develop their software solution are often confused by the prospect of choosing one over the other. Let’s review a quick comparison of the two pricing models — hopefully, it will help you decide the most suitable model for your upcoming collaboration with a software development partner.
| Feature | Time & material | Fixed price |
| Project size | Medium | Small |
| Deadline | Flexible | Firm |
| Changes in requirements | Allowed | Not allowed |
| Customer oversight | Sufficient | Minimal |
| Project launch | Fast | Delayed due to calculations |
How to choose a pricing model for software development that works for you
When you are about to embark on a journey to develop your software idea into a full-fledged product, there are many important choices you need to make, from the technologies to use on the project to the target audience of the solution and how it will affect the functional requirements of the product. One of the most vital choices to make when working with a development partner is the choice of a pricing model: it will determine the cost of the project, the timeframe and milestones, and often the success of the project itself. Here is how to choose the best software development pricing model for your needs:
- Review project requirements. The scope and size of the project are two of the most essential factors determining the pricing model and the cost of the project. When developing a large project, or starting with MVP development with the prospect of going bigger, the fixed cost model will likely be too limiting for your goals.
- Consider flexibility. A small to medium project with firm requirements that are not going to change as the project progresses is the perfect candidate for a fixed cost pricing model, while a project that is likely to change direction multiple times will benefit from the dedicated team or T&M model.
- Think about the deadline. The fixed cost model delivers the best result when the product is expected to last for two to three months, while medium and long-term projects can become even more effective and engaging for all participants with the time and material or dedicated team models.
- Plan the budget. The budget is another crucial factor to account for in your choice of a pricing model. In case you operate within budget constraints, a fixed price project will help you keep your expenses under control and avoid additional spending. The flexibility of other development pricing models also makes them more expensive in the long run.
- Decide on the desired level of control. We have already mentioned that different software development pricing models suggest different amounts of control on the client’s side. If you want the team to work mostly independently, then fixed cost projects will work well for you. If you are prepared to assume some control and responsibility for the project, consider the remaining models instead.
| Feature | Time and Material | Dedicated Team | Fixed Cost | Mixed Model |
| Flexibility | High | High | Low | Medium |
| Budget predictability | Medium | Low | High | Medium |
| Level of control | Medium | High | Low | Medium |
| Deadline | Free | Free | Fixed | Fixed + free |
| Best suited for | Projects with requirements that may change over time | Long-term projects that require full commitment | Small and medium projects with a clearly defined scope | Projects that need both budget predictability and flexibility |
Bottom line
Different elements influence the success of a software development project in different ways. Some of them — like clear and realistic project requirements or the experience and seniority of the team — impact the project more directly. Others, including the software development pricing models, look like they have a more subtle effect at first glance. In reality, a well-chosen pricing model impacts pretty much every aspect of a software development project, from the cost of development to whether the team is able to complete the project on time. Hopefully, the information in our article will help you confidently choose the right model for your next collaboration with a development team.
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