Is fixed price software development a good option?

The fixed-price software development model is the most traditional and standard model used in the industry. And when it comes to software development, the idea of sticking to a fixed budget seems appealing to many. You feel more in control and are less likely to overspend or give in to unwarranted temptations. But do you think implementing a fixed price software development model is a good option?

Software development projects with a defined scope and timeline can benefit from fixed price models, but they are difficult to manage and result in cost overruns. It’s essential to carefully consider the pros and cons of this model before making a decision. So, this article will discuss the various advantages and disadvantages of the model in detail so that you can carefully decide whether this approach is suitable for your company or the project.

What are the benefits?

The fixed-price pricing model has a number of benefits, including the assurance it provides in terms of cost and timeframe and less command over the software development project. Let’s check all of them:

  • Cost and time frame assurance
  • The project requires less control

1. Cost and time frame assurance

The first and foremost advantage is the certainty of the cost of the project. This pricing model gives you a sense of certainty regarding the total cost of the project; you pay the agreed-upon amount and do not have to worry about anything else.

You can also be sure of the deliverable dates when you use fixed-price contracts. This approach necessitates a good planning process because each deliverable must be estimated separately. You will likely pay more after the process is through, but everyone will know how long it will take to finish the feature, the milestone, and the project as a whole.

2. The project requires less control

Fixed-price contracts typically include a project manager as part of a managed team. During the initial project planning phase, you can decide to delegate all decision-making to the service provider if you do not want to be involved in the project management phase. You will only work on the project as needed.

Any human error, technology risks, or changes in the economic conditions that may happen during the project will not be the customer’s concern; it will all be the responsibility of the service provider. Fixed-price estimates are typically higher than other costing models because they account for all foreseeable and reasonably likely risks. If some of these risks never occur and the team composition remains constant, the cost becomes project revenue. 

What are the drawbacks of the model?

Fixed-price development can be disadvantageous for a variety of reasons, including:

  • Limitations of scope
  • Inaccurate project estimation
  • Postponed market launch
  • Lack of adaptability
  • Few chances for innovation

1. Limitations of scope

Fixed-price budgeting can impose constraints on your project, making it difficult for you to adjust to market dynamics and provide a product that satisfies present demands. However, fixed budgets can offer a feeling of control. The modern world is changing quickly; markets can change drastically in an instant, user needs change, and rivals are constantly adapting. Success requires the ability to adjust. In reality, you are giving up control just when you need it most when you limit yourself to a set scope.

2. Inaccurate project estimation

It is difficult to estimate how much time and effort will be needed for complicated software development projects, mainly when the projects are innovative and complex. If the estimated scope is not met, fixed price contracts based on upfront planning may result in functional or quality compromises.

3. Postponed market launch

It takes time to plan everything out in detail for a set budget, which can delay the release of your product. Setting functional software as a top priority enables quicker entry, the chance to get feedback, and the ability to produce results sooner.

4. Lack of adaptability

Fixed price agreements limit the flexibility to adjust and modify during the development process. Flexibility is essential in the ever-changing digital landscape to accommodate new ideas when needed and adapt to changing requirements. If the development is done faster, the delivery will be soon too.

5. Few chances for innovation

In fixed price contracts, meeting predetermined requirements is frequently given top priority, which leaves little opportunity for innovation and the incorporation of creative ideas that come to mind while developing a product. Continuous innovation and iterative development are often beneficial for digital products. Producing a genuinely innovative and competitive product may be hampered by this rigidity.

Are fixed price models suitable for you?

First of all, when the project has well-defined deliverables and requirements, a fixed price contract can be used, as well as when you have a determined deadline for delivery. Furthermore, fixed price contracts work well for projects with set budgets. It is crucial to keep in mind that more significant and more extended projects are more challenging to complete in a high-quality manner with fixed price contracts.

It means that small projects with a constrained project scope or MVP projects with a tight deadline will benefit from this model. When delivering a large, complex solution with multiple deliverables and dependencies, consider a time and materials approach for greater flexibility and reliability.

So, we discussed the benefits and drawbacks of the fixed price software development model. Now, it’s your turn to decide. You need to be aware of each one and know your expectations and capabilities in order to determine if this is the best approach for your project. It is worth considering a time and materials approach because, as previously mentioned, it will provide much more flexibility during project development.

Interesting Links:

Check out more information about Fixed-Price Software Development

Fixed Price vs. Time & Material Contract Software Development: Which One to Choose?

Pictures: Canva

The author: Sascha Thattil works at which is a part of the YUHIRO Group. YUHIRO is a German-Indian enterprise which provides programmers to IT companies, agencies and IT departments.

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