When a fixed-price model is not the best option for custom software development

28 April 2021

Alexey Borisov

Co-Founder of Rocketech

During the current worldwide situation with COVID 19, everyone understands that IT is going to be everywhere, and businesses can’t move forward without digital presentation and software that will help them in the business process. So many new companies and people are coming to the tech business to make the first project. There are different ways to make the project first — own in-house team which is usually very long to build up and very expensive in the end. Another way of making an IT product with some contractor is by specializing in building up to something all the time. Let’s assume that you chose the second option.

IT market of software development is very young, and different companies work in several ways. We will focus on specific model, Fixed price, and problems that it brings to the project and Founders that possibly just have worked with this model before in other industries all the time. Also, most of the time, that is the reason for big problems, in the end, risks occur, and sometimes products are not released.

One more thing that we will talk about specifically is making software or digital custom-made products. So, it’s all about mobile apps, web platforms, games, CRM, LMS, FinTech, Foodtech, social networks, etc. In this field, ROCKETECH specializes, for more than 5 years, and for every single issue, we have the solution. In 90% of cases, when experienced founder come to us nowadays, they don’t choose the Fixed price model and here are the reasons why:

1. The gap in tech requirements in beginning and at the end of development

Custom software has a lot of uncertainty with what has to be done - market, end-user, and customers, investors, product owner, tech possibility, etc. Once you fix all requirements, after a few months or weeks of active development, there will be a lot of questions that are simply not covered in the tech requirements that you fix on the paper with a vendor. And after that, what happens is that the vendor building the project sees it in a particular way, and according to the tech paper document that has been agreed.

Professional studios make a step of collecting requirements, which is very long and quite expensive, and it takes a few weeks and sometimes even one month to prepare paper the “bible” that the vendor will put in the contract and then have to work on it. So, tech documents, with every gap or no clarity, make it the responsibility of the Product Owner of the project to decide the development of every feature.

ROCKETECH is not specializing in this kind of useless work. We prefer to build something that will continue being used and will bring value to the founders, and that is why we are making a system for tech requirements that assumes flexibility and changes that will be possible all the time.

2. Budgeting - Fix price model will overcharge you for every single feature

So, when the agency is fixing requirements, of course, they have to present to you an estimate at the money frame. Many founders that are making the first project in IT think that everything is simple, and that developers all the time implement what they estimate before, but because we are a custom-made industry and every project is unique, estimation is a complex task. This is why the agency is always overcharging for every single feature, because they take a lot of risks, which makes the price more, and it will guarantee more that result will be excellent and it will be quality enough.

We at ROCKETECH have a unique way of working that is based on the best practice of work from SCRUM and our own experience. So, we have our know-how to estimate every task, since we stay on one of our principles that we don’t need more than what is needed to implement what you want.

3. Every feature takes longer.

Because you fix all the requirements in the beginning, the vendor will plan the work accordingly, and usually, it takes months because features have to work properly, and you can’t get access to the system before everything is ready. That is the reason why Fixed price projects can take 3-4 months for the first MVP or even more.

Time & Material is a good option to cover this problem, but in that case, the agency becomes simply a staffing company that possesses no value.

We at ROCKETECH have designed our model of work that split on sprints and gives very fast changes implementation.

4. Tech stack is chosen not by the company according to your needs

Because you agree on everything at business logic of the software, don’t forget to fix the tech stack. Remember that if the agency estimates without detailed work, it means some kind of refinement of your requirements that can have a long list and not be free, then the selection of this tech stack can not be professional. What is not professional?

  • Vendor choosing the tech stack based on his availability
  • The stack can be very unique and, for you after, will be a very big problem with support
  • Limited technology that can’t work properly at scale
  • Choosing tech stack according to available people

We at ROCKETECH work in a more complex way. We spend time understanding the requirements and business logic, and after that, we talk with our different devs and leaders of competencies. Together with design, the best way for project success.

5. Fixed price will give you team that oriented on contract and tech papers

So, you agree on the Tech Requirement Specification document that will go to the contract. After the Development vendor fixes it, congratulations! Now, the Product Owner of the project has been changed and it is now a TRC document. From one point of view, it is good because you just wait for the result, but let’s take a look at this from the other side. The agency will make everything that has been agreed there, but because you will not be diving into the whole process, many decisions can cause you big problems after making changes, or gap in functionality, or what often happens in case of problems is that a company will make everything according to the contract and TRC there, so if the agency makes wrong or poor quality code, you will never know that. Moreover, you can’t predict the future and whole works and requirements for every feature. That is why it is only when you get the product after the Fixed price that you will see it, or maybe you will see problems only after the release, which will bring you way more problems...

ROCKETECH has another philosophy of work: We prefer to focus on process and give maximum quality with features that we deliver. We take into account that requirements can be changed and we make them together with very transparent work and its results. We are working all the time with Product owners that are becoming our long-term partners. It allows us to provide the maximum efficient team that delivers.

6. Change of functionality takes a very long time and is very expensive

When you fix all requirements, in the beginning, developers are often planning one stable architecture that will build up the whole project. It means that it will be very complicated and very costly to make changes to it. Once you start putting in extra features, it could take much more resources to add something than it was before. Possibly after, you think about why you had to overpay so much. Because the agency just keeps overcharging you for every step.

ROCKETECH is focusing on the very flexible architecture of the project, and we prefer to make bills only for what has been spent at work. Product owners together with us make decisions on functionality, and if before sprint we see that we don’t need it, then we simply throw away some features. But if you come to the fixed price, you can’t make so fast and easy changes.

7. Fixing the cost and time at the beginning of the project may affect the quality

We are in custom software development. It means there will be some problems with the realization of functionality, that one way or the other. Usually, because we are in the project management industry as well, we have three bases of resources triangle - quality, time, and budget. Because sometimes Founders think that it is a smart idea to fix everything on the shoulders of the vendor, but fixing immediately from begging costs and time, you let the vendor work only with quality. What will happen once there is a problem, and what will be damaged a lot? You are right, quality!

ROCKETECH often talks with customers to better understand their needs, and usually, we work with one or a maximum of two parameters costs or time, and quality is our top priority anyway.

8. Payment afterward creates so many big problems because all deliverables are after 100% are done - You get source code only after payment

With fixed-price, usually, everyone is working with different steps in payment procedure, but every agency is the same in one thing; you get the code of the product once full payment has been done. So, after the Founder has made the whole payment, he gets his product that could have many problems inside.

ROCKETECH gives full access to the code without any problems. We believe that web or mobile apps have been implemented only because of your idea and energy that you spent and gave to us in the budget frame, and it is your intellectual property, not ours.

9. Fixed price is all about the conflict of interests between the founder and vendor

Contacts that have been designed for work with Fixed-price are focusing all the time on stability and clearing features that have to be implemented. They will never take into account that there is a very big uncertainty in requirements, market needs, the business model itself, end-users, etc. Founders are focusing all the time on the market and its subjects, but the vendor is focusing on the contract. Conflict will come anyway because you communicate only with a Project manager who is not familiar with the code.

ROCKETECH makes very transparent works between Product owners and our developers. We always say that our developers are your developers, and in that case, we are in “one boat” and going together to the product-market fit.

10. Fixed price never last long because the markup of the agency is very high but the value is really low

The cost of every feature with an estimation of Fixed price always includes many costs and risks. The agency is always making this because they need to balance with uncertainty, tech limitations, people problems, etc. that nobody sees at the beginning of the project. So, Founders overpay for every feature that the agency is delivering.

ROCKETECH prefers to focus on fact only. We work with deposit prepayment, and we make bills only on what has been spent and what exactly has been delivered to the Founder and market itself. We don’t make any extra cost, we make a very transparent estimation of a task, and we prefer to build up relationships on trust.

Overall, there are several risks and problems at Fixed price, so please place your attention before choosing it. Take a look around and try to take on the risks that I have listed here, or you can contact us. We will be happy to help you and bring your ideas into reality!

Our experience is your success!

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