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Pros and Cons of Fixed-Price Model in Custom Software Development

The fixed price model is, perhaps, the most traditional and commonplace pricing model used not just in IT, but in virtually all spheres of life. It is as simple as it can possibly be – a fixed scope of work completed for a fixed price, time being a negotiable variable. This approach is used ubiquitously – from a simple plumbing job to a standard car service, we are used to paying a fixed price for tasks whose girth and essence we are able to comprehend and assess.

In the IT world, fixed-price contracts are also quite common, although the focus is gradually shifting towards agile development with its variable costs and overall superior flexibility. However, there are still countless situations where the customer will require firm commitment to a particular budget, especially if this customer comes from the public sector. The cost of the project is determined by examining the existing project documentation or creating it in the course of the initial elaboration/modeling phase that aims to scrupulously analyze the project requirements and adjust the initial “rough and dirty” estimate. Once the estimate is final, no changes to the scope of the project are allowed and any change requests are treated as additional functionality that can only be implemented upon the completion of the current phase of the project.

Advantages

The benefits of the fixed-price model are mostly on the customer’s side. By signing a fixed-price contract, the customer delegates all responsibility for the outcome of the project to the supplier. Impacts of human error, technology risks, changes of economic conditions are no longer relevant to the customer and become the vendor’s problem if any of these risks are triggered. However, the supplier is not exactly the disadvantaged party here. Fixed-price estimates are traditionally higher than in case of other costing models, as all foreseeable and reasonably likely risks are factored into the price. If some of these risks never play out and the composition of the team remains unchanged, their cost turns into project revenue. If the project is accomplished faster than expected, it also becomes the vendor’s premium. However, many customers opting for such contracts are fine with this, as it allows them to put precise figures in their budgets and plan current and future spending in advance.

Yet another advantage for the customer is the limited involvement in the project. Active collaboration is typically required at the initial and final stages, when requirements are elaborated and when the deliverables are handed over to the receiving party for acceptance. The initial input of the customer into the elaboration process may be substantial and is often phased out into a separate subproject preceding the main one. Throughout the active development phase, little to no efforts are required from the customer to support the execution of the agreed plan.

In the overwhelming majority of cases, fixed-priced projects are based on the waterfall methodology, which dictates the supremacy of meeting deadlines and milestones while keeping the scope frozen until the project is over. Final acceptance is formalized and based on a number of criteria that the parties agree on in advance. Since fixed-price projects are time-limited and finite, most vendors offer a warranty period as a token of confidence in the results of their work.

Disadvantages

Contrary to the advantages being mostly on the customer’s half of the field, the disadvantages are mostly with the vendor/supplier. Since the contractor bears full responsibility for the final result, the cost of error is really high, which makes the preparation phase extremely important. This is where the contractor needs to do away with all the unknowns and uncertainties, gather and elaborate the requirements and meticulously define the acceptance criteria to avoid potential disputes in the future. Every fixed-price project has a point of no return – a moment on the project’s timeline where no major changes can be effected without ruining the economy of the project and/or jeopardizing the pre-calculated deadline. Therefore, fixed-price projects require scrupulous preparation, planning, ongoing monitoring and coordinated actions of everyone involved.

The customer, however, is also affected by the lack of flexibility intrinsic to fixed-price projects. If a change is required while the project is already under way, it is impossible to fit it into the development schedule without moving the milestones and breaking resource booking. Therefore, all change requests pile up and have to be processed after the main phase of the project is completed.

Conclusion

Just like every other type of engagements, fixed-price contracts have their ups and downs. Combining budget-wise transparency and predictability for the customer, it presents the service provider both with organizational challenges and possibilities of having a wider profit margin if risks are assessed correctly. Fixed-priced contracts rightfully deserve their place under the sun and are routinely used for projects where both parties are in accord over the scope to be delivered. At the same time, a company’s ability to consistently deliver good results in fixed-price projects is the prime indicator of the maturity of its processes and high qualification of its employees. Cortlex has delivered dozens of FP project and follows the industry’s best project management practices to ensure the success of every project and satisfaction of all stakeholders. If you are interested in getting a fixed-price quote for your project, don’t hesitate to drop us a line and learn how our experience can be leveraged to help you achieve your business goals.