Fixed Bid vs. Hourly Rate: Software Development Costs

Software Development Costs

The decision between a fixed bid or an hourly contract is a source of great debate.

On the one hand, clients hiring software developers want to know what they’re getting themselves into. They prefer fixed bids so they can be certain about the exact price instead of wringing their hands over what the final cost may be. 

That’s understandable – budgets are important! Yet, fixed bid projects rarely go according to plan, especially in the Agile world we live in. And when they do, the final product usually follows a blueprint instead of being shaped by the developers’ expertise and the market’s needs.

That’s why hourly rates are an excellent alternative for building the best possible product. Hourly contracts don’t have to mean budget bloat, either. In fact, choosing hourly rates can help keep your costs down in the long run.

Here we’ll take a closer look at the pros and cons for both fixed bid and hourly contracts, so you have a better sense of how to approach your next software development project and get the results you’re looking for. 

 

Fixed bid contracts

 

Fixed bid contractsFixed bid contracts involve a set price for a defined scope of work. The idea is to create a well-defined project proposal that estimates the total cost of making the product. Clients often opt for this method to get that fixed upfront number. 

Pros

  • You know how much you’re going to pay upfront.
  • You can be confident that your launch date will be met. 
  • You can decide on all the project details yourself. 
  • You’ll get what you asked for. 

Cons

  • If your project scope is missing any elements, you’re out of luck.
  • You won’t be able to make changes or updates during development unless you pay extra on an item-by-item basis. This often leads to “scope creep,” which is when you consistently go over budget to fill in gaps. 
  • Your developers will focus on following the plan instead of building the best possible product.
  • You won’t leverage the developers’ and designers’ insights. 
  • Work relationships may be easily jeopardized by arguments about what’s included (and not) in the scope.
  • The upfront cost is nearly impossible to estimate accurately.

Best use cases

  • You have a small 1-3 month project. 
  • You’re willing to pay extra for changes beyond the scope. 
  • You’re familiar with software development and have a clear vision to move forward. 

 

Hourly contracts (i.e., time and materials)

 

Hourly contracts (i.e. time and materials)An hourly contract, also called a time-and-materials contract, involves billing according to the number of hours your developers work. The idea is to create a product roadmap but allow developers to determine the final cost for features through the time they spend working on them.

It’s common to use hourly contracts for long-term or large projects, as well as those that could benefit from the Agile method.

Pros

  • You have a lot of flexibility to make changes and updates. 
  • You get total transparency about how much features are costing you. Developers can even help recommend how to make features simpler or less cost-intensive. 
  • By leveraging developer expertise, you get a better product-market fit. 
  • You can get a much faster time-to-market and may achieve a working MVP within weeks.
  • You can build a better relationship with your developers. 
  • You can go as fast or slow as you want, according to your budget. 
  • You have better control of the project’s direction and risk management. 
  • Hourly rates encourage developers to be thoughtful about their estimates, which leads to expert-led decision-making instead of just doing. 

Cons

  • You may face an uncertain final budget. 
  • Your product launch date may be a moving target. 
  • You may need to be more involved in giving feedback to developers. 
  • You may require a dedicated project manager. 
  • You’ll need to choose your software development partner carefully. 

Best use cases

  • You want to leverage the expertise of your developers through the Agile method.
  • You care most about the product quality and market fit.
  • You want to ensure a level of flexibility in your project. 
  • You want a quick time-to-market to show the MVP to users and inventors.
  • You have a long-term or large project. 

 

The issue with fixed bid contracts in an Agile world

 

Fixed bid contracts may be the right choice in some situations. But often, clients choose fixed bid contracts, not fully understanding today’s software development process. It’s natural to want to seize on the opportunity for a lower price. Unfortunately, fixed bids projects are rarely realistic, on budget, and successful on the market. 

The Agile method offers another way to build products by discovering the product together through several rounds of iterations. The product is informed by market research, developer expertise, business priorities, and user testing. Most importantly, it’s shaped by the real needs of users, instead of on assumptions. 

Without the Agile method, clients have a clear vision that they think will work but that they can’t test until it’s ready. As you can imagine, this can lead to some problems. In addition, unless a client is knowledgeable about software development, they may have unrealistic expectations about what’s possible, resulting in features that are technical nightmares. 

 

Why the Agile method requires hourly rates

 

Thankfully, Agile was designed to take care of these issues by providing a flexible framework. It starts by building the Minimum Viable Product (MVP) and creating the ideal user-focused product through iterations. By definition, Agile doesn’t define fixed project scope but allows for the project to unfold through discovery. 

For example, nearly all clients experience these moments during software development projects:

  • Your original design was not coding-friendly or intuitive to users.
  • You get new ideas as the development unfolds.
  • You realize that certain elements or considerations were left out of the scope.
  • You collect real user feedback and need to switch gears. 
  • You get new insights into your business model that require project changes.
  • An integration or tool you relied on has changed its terms.
  • You encounter unforeseeable conditions or complications. 

Luckily, these situations can all be handled by the Agile method, which lets clients make shifts and change course as needed. Naturally, the Agile approach is impossible to evaluate with a fixed bid contract and requires hourly rates to capture the scope of the work overtime.

 

Why hourly rates require a trustworthy software development partner

 

Hourly rates require a trustworthy software development partnerThough you may be interested in leveraging the expertise of your developers, you may also be wary of being too flexible and letting your budget go overboard. You might even have past experience with a partner that padded their hours and left you paying more than your fair share.

That’s why the hourly rate contracts require you to find a great software development partner. You need to feel confident in their ability to estimate accurately and fairly. In addition, the Agile method may require you to work more closely with developers, so you’ll have to build close relationships and overcome problems together. 

Taking advantage of developer expertise also means trusting in their technical know-how and the options that they put forth during your project. Without trust, it’s nearly impossible to feel confident that you’re selecting the best technical solutions for your product. 

For this reason, choosing the right software development partner for your hourly contract is a must. Before you jump into your project, be sure to keep in mind these key considerations for hiring a partner in order to set yourself up for success.  

 

Best practices for any type of contract

Fixed bid and hourly contracts are both options for approaching your software development project. No matter which you choose, it’s essential to follow best practices according to your type of contract.

 

Making the most of fixed bid contracts

  • Get quotes from multiple vendors and avoid the lowest rates. You get what you pay for. Request several quotes from vendors in order to have a better idea of the actual cost for your project – and don’t go straight for the cheapest choice.
  • Don’t rush the scope definition process. Take your time to really dig into the technical requirements and exhaust all possible specifications. The more complete your scope, the more likely you’ll stay on budget.
  • Have a clause about dispute resolution, just in case. Fixed bid projects often go awry due to disagreements about what the scope includes. Include a dispute resolution process in the contract, so everybody’s on the same page if these issues come up.
  • Make sure your IP ownership is covered. It’s important to define your IP ownership in the contract. Otherwise, you may find yourself in legal hot water to retrieve ownership of your product code and technology. 
  • Consider how you’ll handle ongoing support needs. Make a plan for ongoing maintenance of your product. Otherwise, you may find yourself without the support you need to keep your product online.

 

Making the most of hourly contracts

  • Overcommunicate. The Agile method is all about discovery, which means it’s vital to communicate clearly. Be available to your developers to discuss issues and give feedback.
  • Don’t get too flexible. Flexibility doesn’t mean the sky’s the limit. You can verify your developers’ hours through a time-tracking tool or ask for feature estimates ahead of time in order to have a good idea of how much you’re spending.
  • Set a not-to-exceed ceiling. Be transparent with your partner about your top-spending ceiling. This can be beneficial to help plan expenses and prioritize features. 
  • Listen to your developers’ insights. This is one of the most significant benefits of hourly rates, so take advantage of it! If your developers have strong opinions, listen to their reasoning before making a decision.

 

The key to any project: your software development partner

 

People in a work meetingAs you kick off your software development project, be sure you understand the pros and cons of both fixed bid and hourly contracts. Depending on your needs, either type of contract may be suitable. While our professional opinion is that hourly contracts generally lead to better outcomes, there are circumstances where a fixed bid contract may make sense. 

Regardless of how your contract is set up, it’s essential that you choose the right software development partner. With a transparent and experienced partner, you’ll be sure to get great results with your product. Hire the right one by learning about the top considerations for choosing a software development partner here

At OrangeLoops, we pride ourselves in having great partnership in our DNA. As a leading Boston software dev shop, we draw up contracts that clarify and motivate our working relationship. We’ll get on the same page so that you feel confident in our ability to build a great product together. 

Are you on the hunt for a long-term partner that values transparency and flexibility?
Get in touch! We are a Boston software dev shop with great partnership as our DNA.

 

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