4 Simple Software Development Pricing Models Worth Knowing

The software development pricing model either makes or breaks the actual software development process. In software outsourcing, it is critical to choose a software development methodology that would perfectly respond to your requirements changes. 

Working with a trusted software development company is a piece of cake if you manage the software development process correctly. The software development pricing model is one of the decision-making steps of successful IT outsourcing. In this article, we answer and dwell on the following frequently asked questions about software development pricing models.

• What is software development methodology?
• Which are the best software development models and methodologies? (How many software development models are there?)
• Can you give examples of the best software engagement models?
• What are the main pros and cons of each software development model?

Before starting to answer these questions, let's clarify what is a software development pricing model or software development engagement model.

A software development methodology or an engagement model in software development is a structured software development process based on a specific client's requirements, such as:

The requirements for the IT outsourcing services

To start the actual software development lifecycle (SDLC) you should have a clear-cut IT outsourcing service requirements sheet. Both the software vendor and the client should evaluate these requirements and agree on the best engagement model that will give deserved results for the resources and time spent. The requirement sheet, in its turn, has specifications based on which model you choose to proceed with. For example, if you know exactly what you want and how to proceed with your software development project, it is recommended to have your scope of work (SOW) or technical requirements document before turning to a software vendor. In this case, your software vendor will be able to give precise estimates. If you have such a project in your mind, check our brand new guide about writing an SOW document like a boss with a real example/sample in it. Download it below.

Your expected result of the project and your primary business objective

You should clearly define what you expect out of the project even if you don't have every single detail and IT outsourcing service requirement sheet yet. This should be sketched out in the software design phase before software developers start coding.

Project size

Do you need a single developer, or are you looking for a trusted software development company? Do you need other IT professionals such as project and product managers, QA specialists, business analysts, business development specialists, etc.? Your team defines your working schedule. The latter plays a dominant role in choosing the right software development pricing model.

Payment methods

Do you want a precise estimate with no changes during the actual software development lifecycle (SDLC)? Do you require developers with hourly rates? Are you convenient with paying by milestones? Without having this information, the software vendor can not offer the best software development engagement model.

Timelines and release dates

Before turning to a software vendor, you should have the answers to the following questions. When do I want my project to go live? Do I want to set release dates for specific features of my product? Or do I want my product to go live after it is completed?

How much control do you want to retain?

IT outsourcing or offshore software development is remote cooperation between a software vendor and a client to build the expected software solution. The keyword "co-operation" has various definitions. It depends on the client's willingness to take active participation in the software development process or the other way around.

SDLC phases

The Software development process is divided into several phases, and it is crucial to recognize where you are in the SDLC. For example, if you want to develop a brand new solution from scratch, you are in the primary stage of requirement gathering. This makes the engagement model selection more flexible. On the flip side, if you want to rebuild or reform your already existing software you should carefully re-examine the work that has been done before hiring this new software vendor.

How many software development models are there?

There are too many software development pricing models in the ICLT industry that make the selection process a bit challenging. Moreover, there is no fixed software development engagement model. Every day a new hybrid model is born based on a company's custom requirements. Currently, there are several tested and proven-to-work methodologies that are always picked up as an example. Each of these models has its pros and cons. Their effectiveness depends on some scenarios. 

Before choosing one of these models, discuss the specifics of your project and requirements. If you are unsure, you are welcome to leave a quick message, so one of our business development specialists will reach out to you.  

At CodeRiders, we ensure our clients are comfortable throughout the SDLC despite their experience level in software outsourcing. We begin with finding the issue, consulting and clarifying the solution, starting the actual software development and implementation processes, and caring on with maintenance and support if requested. 

If you want to learn more about our company, make sure to check out our article about "How It Feels to Work with CodeRiders".

Fixed-Price Software development engagement model

If you need clear-cut software development service estimates and task planning, a fixed-price software engagement model is an appropriate solution. However, you should ensure you have a ready-made document (SOW paper, technical documentation, etc.) that defines your app/website's goal, including mockups and wireframes.

At CodeRiders, we have made a guide to writing a useful, easy, and precise SOW document with a real-life sample. Download the guide for free.

The key advantages of the fixed-price software development engagement model are:

• Specification of business and technical requirements (complete SOW document, technical documentation, etc.)
• Clear timelines on release dates of specific features or the whole product
• Citation of a clear-cut, fixed software development service cost

When is it beneficial to choose the fix-priced model?

• Small and short projects prefer a fixed-price software development model as these projects usually require little to less-complicated features which need a quick and easy implementation.
• MVP (minimum viable product) is a type of product that includes enough and sufficient features for early customers to use and review the product. These projects usually have the purpose of validating the market need before releasing the final product. Thus it is natural that the fixed-price software outsourcing model is an appropriate choice. 
• As a fixed-price software development model accelerates the time spent on the project, it is a beneficial solution for projects that have tight deadlines and run out of time.
• Projects that have predetermined features and there is no chance of future changes in the project.

Disadvantages of the fixed-price software outsourcing model

• Little to no flexibility. Although ensuring your project's completion within fixed-price frames is a plus, the inability to make changes, necessary additions, and improvements during the software development process is a drawback.
• There is no chance to make changes or flip project goals. Once the project outcome is set, software developers start coding, so the product creation process goes as planned and documented. If you have in-detail awareness of the upcoming co-operation and have a related background it is much safer to choose the fixed price model.
• The pre-co-operation stage and planning take more time and effort. As once started, there is no chance of change. It is obvious that, unlike other software development pricing models, fixed price models will take more time, in detail, and long discussions. 
• No need for constant communication and interaction between the clients and the software development house. This is a bit subjective to say as it highly depends on the clients' attitude. For example, if the owner wants more control over the software development process, it is a pitfall and the other way around.

Time and Material Contract (T&M)

The time and material software development pricing model is an appropriate solution for those who do not have clear-cut software development requirements. In this case, clients expect hourly or monthly rates from the software outsourcing house instead of fixed estimates. The software development time and prices are not clear. 

The key advantages of the time and material pricing model are:

• Flexible and negotiable budget with no risks for both sides,
• Opportunity to change requests during the development process,
• You have more direct control over the software development process,
• Opportunity to pay for only the performed work through tracking systems,
• The pre-co-operation process takes less time because there are no specific and tight requirements that should be discussed in detail,
• Your project may be connected with evolving markets, new technologies, and untested facilities.

When is it beneficial to choose the time and material model? 

• Large-scale projects that require lots of time for implementation and constant testing, benefit from the T&M software development pricing model. There is more chance of missing tiny details during large-scale projects, especially if there are no concrete requests. Thus, turning to a T&M software development method is a win-win solution for both parties. This model is flexible enough for the developers to make the required changes in the project at certain stages of the software development process. 
• Complex projects challenge both clients and software development firms to file up complete specification documents, technical documents, or SOW documents. Thus it is natural that the opportunity to make some changes, exclude or include additional and unnecessary features is a win-win approach for both parties.

Disadvantages of the time and material software outsourcing model:

• As there are no fixed requests, the software vendor's management team will work hard to get the project in motion. Unlike the fixed price model, this will consume more substantial hours of effort.
• In a T&M contract, the owner can define the maximum price before starting the actual software development. Thus, there is a risk of leaving the project incomplete, if the contractor fails to finish the project within the budget frames. Here it is critical to find a trusted software development company. However, most of the time T&M contracts are filed up in a way that the risk of cost overrun without legitimate change orders is on the contractor. Check CodeRiders' article about 8 Simple Questions To Ask Software Vendors.
• There are vague time frames and unclear time limits during the T&M model because of undefined final goals.
• If you do not want to be actively included in the SDLC, the time and material model is not the best solution. This model requires constant back and forth communication with software developers to clarify tasks and requirements. The owner should gain some remote communication and project management skills. For example, basic skills working with Trello, Jira, Asana, Slack, and likewise project management platforms.

Dedicated software developers or outstaffing or OTD

Hiring dedicated individual software developers from a software outsourcing firm is an ideal alternative to hiring freelancers, as it is more secure and promises better results. On the other hand, if you need multiple developers with various tech stacks, it is beneficial to hire a team that has been working together for a long time.

The key advantages of outstaffing model are:

• Hiring dedicated software developers or an offshore dedicated team (OTD) requires the most control over the software development process, compared to the fixed price and T&M software outsourcing models. Clients sometimes request the CVs of the individual developers and focus on their skills and expertise. They may even schedule calls with developers individually. During the software development and implementation, they may interact directly with each specialist, assign tasks, monitor their completion, and determine their workload. 
• Hiring dedicated individual software engineers or a team is very similar to hiring an in-house team but without paying rentals, taxes, complementary advantages for the employees, insurance fees, onboarding training, holiday or sick leaves, etc. On the other hand, you don't stumble on the risk of low-quality service if you find the right software vendor, unlike hiring freelancers. Your dedicated software developers are managed by a professional company and these companies take care of their constant evolvement.

When it is beneficial to choose the outstaffing model?

•  If you have solid experience in managing software engineers, meantime you prefer to have complete control over the software development process.
•  Your goal is to take control over work scope, budget, services, and similar things.
•  You want to have direct communication with software engineers, monitor their work, and give tasks.
•  If you need single developers with a specific tech stack to join your in-house team as a support system.
•  If you are unsure how many developers and which tech stack you need. Hiring an individual software engineer from a software outsourcing team allows choosing other team members if necessary. You have a pool of experts to choose from in case you need more developers with other tech stacks.

 Disadvantages of working with the dedicated individual developers or a dedicated team (ODT) model:

• You should completely invest your time and efforts in the SDLC,
• You can not expect a final budget or the cost before starting the project as it is very similar to hiring an in-house employee and paying a monthly salary. 

Hybrid software development pricing models

As mentioned at the beginning of this article, the above-enumerated software development pricing models are tested methods to succeed in offshore software development. However, each company is unique in its tailored needs. Thus, mixing up these models becomes the final working solution for many companies.

At CodeRiders, we work with all of the above software development engagement models, moreover are ready to discuss and find your best tailor-made solution.

To sum up, in business, win those who offer fast, flexible, and easy services. Now competitive service and software implementation go hand-in-hand. The big question is "How to actualize and carry out effective software solutions that will duplicate return on investments?" If organized and managed correctly, offshore software development promises weighty forward movement of the company's position and influence in the market. Choosing the most appropriate software development pricing model for your company is the start of a successful software outsourcing project.