Software development

Fixed Cost Advantages and Disadvantages of Fixed Cost

That’s why even the smallest aspects must be discussed in advance. Ideally, all features should be also described in a written form in software requirement specifications . Such planning activities usually significantly prolongate the time to market. It means you’ll know all deadlines and milestones, so project management will be much easier.

With measurements in hand, the contractor can easily determine how much the project will cost and submit a fixed-price bid for the work. Before entering into either type of contract, contractors and project owners alike should understand their pros and cons and why one may be better-suited than the other for a particular project. On-demand servicesFrom UX/UI design to QA, we support our clients at any stage of their development process.

  • A cost-plus fixed-fee contract predetermines a contractor’s exact profit for a project, regardless of the project’s total cost.
  • There can be several different approaches to getting a fixed price, but all approaches have the same goal.
  • Even the best team can’t deliver a successful product without proper guidance.
  • And this may include things like each project participant’s compensation or the time and money spent on face-to-face meetings.
  • As a customer, you are responsible for any emergent changes that you’ve initialized or those ones that are beyond the vendor’s competence.
  • If something goes wrong in the project, the team will have limited space and funds to address the issue.
  • Currently, dynamic pricing is most present in hospitality, events, transport, and e-commerce.

You set a certain amount of time and money needed to perform a task. Both kinds of collaboration models have upsides and downsides. A Fixed-Price contract is a suitable choice if you have a small project with clear instructions or are certain that no modifications will be required. You will be aware of the project’s cost in advance, and your product will be produced on time. However, it would be best if you were prepared for unforeseen problems or mistakes that may cause you to miss the deadline, incur extra expenses, or leave you with an incomplete project. As the name suggests, a fixed-price contract is an agreement in which the cost is unaffected by the usage of resources or the amount of time spent on the project.

Fixed price vs time and materials: the basics

The first planning step provides a clear path for the development team to follow. The client does not need to have as much control over what is going on and may concentrate on other business operations. The project’s early launch will help a large number of entrepreneurs.

But when it comes to short deadlines, this may be a disadvantage. Even so, we may not be able to prevent certain communication misunderstandings while the project is continuing. As this kind of contract is extremely flexible, disadvantages and problems may arise. The deadline may become a distant date in the indefinite future if we lose control of the project. The Time and Materials model allows for modifications and adjustments to the production process.

If the company strongly relies on these aspects, it may go for competitor pricing – a strategy that gives priority to these variables. That is often the case of e-commerce retailers, who offer widely available products produced by numerous brands. At BGO Software our greatest priority is ensuring a team that has the right assets and technical skills that your custom software or new web application project requires. Project managers and QA specialists are a vital part of our teams together with skillful developers and technology experts. However, the Dedicated Team model remains very customizable as the client has a big involvement throughout the entire development process. When developing a more complex product, the Dedicated Team model is usually the more preferred option.

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Pros and Cons of a Fixed Price Model

Fixed cost is calculated by subtracting the product of number of units produced and variable cost per unit from the total cost of production. In simple terms, the fixed cost is derived by subtracting the variable cost from the total cost. Intersog is a leading IT solutions provider in the United States and beyond. The company has provided agile software engineering and staffing services for Fortune 500 corporations, tech startups, and SaaS businesses for over fifteen years. You understand exactly how much and what you are paying for. The Pricing terms are documented, so no one can present you with an invoice for additional costs.


The percentage typically ranges from 10% to 20% of the total cost of the project. These tend to be smaller projects that a contractor has performed numerous times. But for bigger projects where the scope of work is hard to fully know ahead of time, a cost-plus contract is often the better choice. Before introducing dynamic pricing, any business should test the ground with extensive research.

Pros and Cons of a Fixed Price Model

It can still be profitable for the businesses that sell first-need products with steady demand, but not to such an extent. The industries with stiff price standards and heavy reliance on trust and long-term relationships with clients, like banking, may end up risking a lot. Have you decided to outsource the development of your new software product? Choosing the right model of work for the creation of your custom web application is the first and most crucial step.

If you choose to price your services via this method, you’ll want to create a buffer in that pricing to accommodate for unexpected roadblocks that may require additional time and resources. With specified requirements, fixed budget and pre-arranged deadlines — there won’t be any surprises. Regular project management interaction with the contractor ensures scope compliance and protects margins. A fixed-price contract is often appropriate for projects with a predictable scope. These tend to be smaller projects that a contractor has performed numerous times, like replacing a roof.


One of the best things about fixed price is that it is rather transparent; you know exactly what you sign up for and where your money goes. No hidden catches, no charges, no surprises – everything just goes according to plan. Assuming you work with a reliable and honest partner, the time and material model is also rather transparent. A good vendor will always give you all the vital information on the project’s progress, the time spent working on it, and all the expenses.

This allows you to track progress and know exactly where the team is at any point. Also, to limit the risk of changing requirements, the software house usually charges a premium for the uncertainty . In time and material, there’s no reason for this overhead. With time and material contracts, changes aren’t a problem. Plus, the cooperation is open-ended, so when you feel the current state should be enough for the MVP, you can end it.

The Pros and Cons of Fixed Price Sales and Recurring Billing

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Pros and Cons of a Fixed Price Model

Due to this, we consider ourselves competent enough to compare the two pricing frameworks and give you pieces of advice regarding which one to go with. However, if a project requires a different approach, the fixed-price agreement isn’t off the table. Later on, if you find the result of our work satisfying and you need to create a fully-fledged and feature-rich app, we can shift to a Time-and-Material type of billing. In the time & materials model, you are able to adjust the project’s requirements and shape to constantly changing business circumstances. This way, there’s no need to renegotiate the contract or conduct painful discussions with the software house to determine whether a feature was or was not in the scope of work. Project – A fixed price contract doesn’t fit well projects with high complexity, since it’s hard to determine all the requirements so specifically from the beginning.

Partnership & Pricing Models: pros and cons of the fixed price model

Meanwhile, contracts that base a contractor’s profit on a set percentage of the project’s total cost are called cost-plus fixed-percentage contracts. There is no dynamic pricing without training the algorithm with an extensive historical dataset and access to current market trends in order to fixed price vs time and material produce real-time pricing. Segmentation-oriented strategies, although very effective, require customer data that the business has to store and process. The flexibility of dynamic pricing enables companies to manipulate prices in a way that stimulates sales in periods of lower market demand.

Fixed Cost Model

This document regulates the processing and protection of Users’ personal data in connection with their use of the Website and has been prepared by Nexocode. Still, some companies have doubts about whether to implement dynamic pricing because of that risk factor. However, we believe you can avoid the negative outcomes with education and transparency.

Why Every Developer Should Become a Software Engineer Consultant

At the same time, developers usually just want to tick the boxes on the feature list. Fixed pricing is a strategy in which a price point is established and maintained for an extended period of time. Dynamic pricing means the price on a product or service can change over time. Selecting the appropriate strategy for your business has major implications in your ongoing effort to attract customers and achieve optimal profit margins.

Time and Materials Contract vs. Fixed Price Contract

Every aspect of the development process, project management, quality monitoring and assurance are on the service provider. Being a pioneer may pay off, but it does not have to – and not every company can afford to risk a pioneering strategy. So, it is worth first researching the attitude of the particular market towards dynamic pricing and its particular types, as well as its effectiveness in maximizing profit. In practice, dynamic pricing may sometimes seem to work against the favor of the company’s profit. At times, the algorithms lower the prices to extreme levels.

The best ideas for improving your product might evolve during the development process. But if you’ve chosen the Fixed Price contract, applying changes will be hard. You’ll need to issue a change requires and ask the team for reestimation. This will slow you down every single time you want to make a change.