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3 Most Popular Pricing Models In IT Industry

The pricing models in the IT industry is considered as one of the most important factors in cooperation between a client and a developer (team of developers). Payment model – contract type. It forms the cost of services, timelines, and amount of work for project development. 

A successful pricing model should ensure the balance between:

  • Client expectations in terms of quality;
  • Timeliness;
  • Cost;
  • Efficiency.  

In this article you will learn:

After you read this article you will have an understanding of the specifics of three frequently used price patterns: Fixed price, Time and material, and Dedicated team. And you will be able to make the optimal decisions for your particular situation. 

Fixed-Price model (FP) 

Fixed-price model – cooperation model assuming precise work plan. The client and the contractor draw up an exact plan after a detailed discussion of the scope of work, possible risks, etc. This pricing model provides the client with a guarantee that a certain (fixed) volume of design work will be completed by a specified date for an agreed price.

What you pay for: for the result. The terms of the work and the cost are agreed upon in advance. Any additional work is subject to prior approval and estimate. If approved for implementation, delivery terms and the budget are updated. 

Main stages of work with Fixed Price: 

  1. You send a request and project requirements.
  2. You and the contractor agree on all the details.
  3. The contractor sends you the final agreement with prices and project details.
  4. At the moment of sign off all the issues are to be settled, and all the requirements to start the work should be met. 
  5. Both parties sign the agreement and project work starts.

Note(!) FP model implies the management and testing of the project by the contractor, which is included in the cost at the approval stage. As a result, the customer receives intermediate deliverables (if required) and is actively involved in the acceptance of the version close to the release.

Suits you when:

  • You have a technical documentation for the project (if you don’t have it, you will need to prepare it by yourself or with the contractor’s help);
  • You are confident that project requirements have been defined and will not chаnge in future;
  • You need to create a small/urgent project (less than two months) with limited functionality/an MVP;
  • You want to create a project but you have a limited or fixed budget. (!) It is important to understand that there is a high probability not to fit all the desired features in the budget;
  • You don’t want or you don’t have time to control the project.

Time & Materials model (TM) 

Time and Materials model – cooperation model based on the actual hours worked by the contractor. 

What you pay for: for hours of developers spent on fulfilling a certain task or a number of tasks. Cost and timelines are estimated approximately. Payments are made based on the provided detailed report on the spent hours and accomplished work.

Main stages of work with Time and Materials:

  1. You send a request and project requirements.
  2. Scope of tasks is assessed, consensus on development stages and should be included in each stage is reached. The customer can change the priorities of tasks, add new tasks, etc.
  3. Man days are multiplied by the rates of developers resulting in the cost of the task.
  4. If an agreement is reached, both parties sign a contract, and work on the project begins.
  5. After fulfillment of certain scope of tasks within a given period, you pay for the work based on worked hours. 

Suits you when:

  • You have a long-term project and not clearly defined requirements;
  • You want to launch the project works as soon as possible. I.e. you don’t want to spend time documenting additional requirements that might appear within the process of project development;
  • Your project is in the phase of testing, technical support, or finalization
  • You want to have solid project control: communicate with the project manager and discuss requirements;
  • You want to follow the development processes, i.e. get intermediate versions with finished functionality.

Dedicated Team model

Dedicated team model – cooperation model when you hire a team of developers or a single developer for your project to scale the capacity of the existing team. The hired team works in the contractor’s office, though you are the one controlling its work.

What you pay for: monthly salary or hourly wages for all the employed developers. Usually, payments are made on monthly basis.

Main stages of work with Dedicated Team:

  1. You send a request for the technical skills of the required developer and a brief project description
  2. Based on the requirements you get a list of available developers, their CVs, and availability dates. Interviews of preferable candidates are appointed
  3. Based on the results of the interviews you decide whether the developer is suitable or not 
  4. A developer onboards your project and starts working on the prioritized tasks in compliance with the processes set in the development team.

Suits you when:

  • You want to fill the gap in the existing team. For example, you don’t have a developer with the required technology;
  • You want to reduce overhead costs: office rent, office equipment, employee perks, etc.;
  • You are not certain about the final functionality of the project and want to change project requirements in future;
  • You want to put a development team together as soon as possible;
  • You want to be always aware of the latest progress in development at your project and to fully understand what the money is paid for.
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Wrapping up

We have covered the three most popular pricing models in the IT industry: Fixed price, Time and material, and a Dedicated team. To consolidate the above-mentioned information we have compiled a summary table for all three pricing models:

At the end of the day, the choice of pricing models depends on the needs of your project. Consider all the specifics covered above: the complexity of your project, available budget, project duration, level of control, etc.

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