Fixed Price Model: How Can It Benefit Your Business?

6 June 2022

Veronika Nedashkovskaya

Content Manager

Delegating software development has become common practice in the era of global digital transformation. However, IT outsourcing pricing models may appear confusing for many small and mid-size businesses. Such companies usually don’t have the necessary resources to build in-house IT departments yet they need custom digital products to compete in the market.

While many experienced founders need more flexibility from the dedicated team, some projects will significantly benefit from the fixed price model (FP). The Rocketech experts explain what a fixed price business model is and when you should consider it to get the best outcome.

What Is a Fixed Price Model?

An FP contract assumes a fixed budget for a development project, approved before the beginning and not changing in the process. Such agreements also include specific (and often strict) deadlines. In most cases, the service provider (a custom software development company or agency) takes all risks (like going over budget or not meeting the deadline).

In other words, the client pays a predetermined price based on the estimate of resources that the contractor provided before the contract was concluded. It is a model that guarantees a fixed budget for the project, regardless of time and cost.

It’s a common contract type in the IT sector as customers look for higher levels of confidence in the project outcome within the specified timeframe and budget. It’s mostly the go-to option for customers who know the scope of work and can provide specific content for the project.

Fixed Price Contract Features

Although the form and type of a fixed price agreement can vary depending on the vendor’s work style and the client’s requirements, these contracts have common and universal features you should consider when signing them.

  • Both parties should agree on the three main constraints of project management: time, money and the scope of work.
  • The client can define the product’s quality as the contract requirement. If this criterion is not covered, quality often becomes a bargaining chip in unforeseen situations. In these cases, changes are only possible as separate and additional agreements to the main contract. Naturally, it involves extra payments.
  • The contractor should take the main risks. At the same time, the risks affect the estimate of project time and cost. For example, urgent or sophisticated projects have a higher chance of unpredicted circumstances.
  • Fixed price model contracts usually assume payments upon the project’s completion. However, different kinds of prepayments, deposits and mid-project contributions are also possible if both parties agree.
  • The FP contracts usually allow the vendor to hire employees without agreeing with the client. Some service providers can train junior level specialists during such projects. However, it may cause complications with providing access to the client’s systems.
Rocketech Approach

Our team consists of Middle+ and Senior level professionals. We don’t train rookies at our partners’ expense. On top of that, we provide our clients with consulting services in compliance and legal aspects of custom software development.
  • Fixed price projects may be challenging for vendors with no previous experience with such contracts.
  • FP projects often become the basis for further tech partnerships between clients and service providers and lead to other contract types.

Benefits of the Fixed Price Model

We have already summarised the main concerns clients have when considering fixed-price contracts. Although this approach may not suit many projects and objectives, our experience shows that considerable advantages of the fixed price model shouldn’t be easily dismissed out of hand.

  • Strict and Clearly Defined Deadlines

If the developers know the exact goals and complexities of the project, they can calculate a detailed plan and timeline for the project.

  • Fixed Budget

Every part of the budget is well-specified and agreed upon before both parties sign the contract. The vendor can’t alter the price without prior notice and additional agreements.

Rocketech Approach

– If we got the job done ahead of schedule or didn’t spend the risk budget, we keep the unspent money.
– If we had made a mistake in our estimate and the job required more resources than expected, we will cover these costs at our own expense. Our clients don’t pay anything additionally.
  • Predictability

Both parties discuss and plan every stage of the project beforehand—phases, specifics, tech stack and development control. It makes it easy to track the development status. And there is no need to allocate additional resources for monitoring.

  • Clarity

The client has a clear vision of the product’s final version, feature set and technical details. 

Common misconception: If we have specified the terms, the cost and the scope of work, everything will go as planned.

Reality: Terms of reference are never complete. There will always be moments that you and the developers will interpret differently. It’s vital to maintain tech-specific dialogue to get results. 

Rocketech Approach: We exclusively collaborate with Middle+ and Senior level specialists. Our extensive experience allows us to make precise planning and allocate resources only necessary for the project. Moreover, we assign a project manager to each project for comprehensive reporting. When choosing a fixed price model, our clients don’t need to dive deep into details and communicate directly with the developers if they don’t want to.

When Does the Fixed Price Model Work Best? 

The fixed pricing model best fits small projects with clear and well-specified functionality. Ideally, such products don’t change for at least a year after launch to bring results. Most common fixed price model project examples include

  • Generic corporate websites;
  • Generic online stores;
  • Landing pages.

However, the options to benefit from this cooperation model go beyond standard and simple web pages. You should consider it in the following cases.

  • You need to develop an MVP.

A minimal viable product (MVP) is an essential first step to entering the market. MVPs have basic but sufficient functionality with well-defined features. It means comprehensible requirements suitable for a fixed price project and a lower probability of changes in the development process.

  • You already have extensive documentation.

Some customers look for software development services when they already have all the necessary documentation for the project, including a software requirements specification (SRS), a well-developed plan, workflows, wireframes, customer journey maps and user stories.

  • You are sure the project requirements won’t change in future.

Due to the rigid nature of the fixed price projects, every (little) change is a matter of additional working hours, resources and, as a result, extra cost. 

  • You are not willing to actively participate in the development process.

Many customers prefer to discuss the entire project at the initial stage, delegate the process to the respective professionals—project managers, developers and QA engineers—from the contractor’s side, get regular reports and receive a ready product.

  • You are looking for a long-term partner.

A short FP project may be an excellent option to test the contractor. If everything goes right, you can safely consider switching to more flexible collaboration models and establishing long-time tech partnership. 

Is Fixed Budget the Answer?

The fixed cost price model is often criticised due to its lack of flexibility. On the other hand, many customers who prefer delegating the entire scope of work see it as a universal approach. At Rocketech, we know from experience that there’s more to it.

Our philosophy is based on the idea that each project and business are unique. There’s no definite answer to the “What pricing model is the best?” dilemma. We guide our partners throughout the entire project and share our business expertise. When choosing a suitable contract, we consider many variables to suggest the best-fitting solution that will benefit both parties as we succeed together with our partners. Not sure which model to choose? Contact us directly.

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