Fixed vs Hourly Rate: Which One is Better for Your Software Development Project

Confusion is a word we have invented for an order which is not yet understood!

The continuous rapid growth of the global outsourcing market, especially pertaining to software development projects has helped countless businesses in improving their customer service, cost-cutting, and subsequently, sales. But the cost of getting these projects done differs from company to company, depending on your software development team’s pricing model, expertise, and location. The biggest dilemma faced by the outsourcers is comparing fixed rate vs hourly rate. Here’s a sharp contrast between both these pricing options to help you make an informed decision!

Fixed Price Model

In a fixed bid agreement, the scope of work and the estimated time required to complete that work is decided well in advance. A price for these services is fixed mutually by both parties and this price cannot be changed later on. Usually, when you hire dedicated developers from India for a small to medium-sized software development project with strict deadlines, short timelines and a limited budget, this type of pricing model is an ideal pick. The risk associated with the fixed-rate model is mainly that you cannot alter your project requirements or influence the overall development process.

Advantages of Fixed Price Model

• No Hidden Cost – As the exact price you need to pay is mentioned in the contract, you can rest assured that there would be no hidden cost down the road. Your total project expenditure is duly projected, keeping in mind the development stages, project specifications and delivery date.
• Foreseeable Deadline – Before the contract is made, the finished product’s functionality would be discussed with you in detail in this pricing model. This means that you will never miss any essential information related to your software development projects.

Disadvantages of Fixed Price Model

• No Flexibility – We just learned that in the fixed price model, every intrinsic project detail is discussed beforehand. While this is a good practice usually, it might refrain you from putting out any suggestions or making any changes during the project implementation stage.
• Reduced Quality Control – In case you end up signing a fixed-bid agreement with the wrong outsourcing service provider, they might be more focused on completing work in the specified time frame than adhering to the desirable quality standards. We’re not saying that you would be necessarily investing in imperfect software by opting for this pricing model, but just that your hired engineering team might not have time for improvements after the delivery date.

Hourly Rate Model

If you hire dedicated developers from India on an hourly rate model, it implies that there is no fixed price set between both the parties. However, you pay for every hour that your remote development team works on your project. Also known as T&M (Time and Materials) contract, this type of agreement is ideal for outsourcers who seek high flexibility within their software development process, especially if it involves Agile framework. The hourly rate model works best for software development projects, wherein it’s difficult to estimate the project’s completion time at its start.

Advantages of Hourly Rate Model

• Transparency – This model facilitates complete transparency of the progress of your project and any changes that occur within it.
• Cost Control – Surprisingly, this pricing model might reduce the overall project cost as the suggested improvements can be implemented throughout the entire development process.
• More Involvement – As an outsourcer, this pricing model encourages you to take part in the software solution development process. This would make sure that the end-product reflects your vision and fulfils your business needs.
• Flexibility – We’ve already discussed why this type of pricing model is an ideal choice for software development projects that require flexibility. You will be able to introduce new features and alter the product’s functionality, as you deem fit.

Disadvantages of Hourly Rate Model

• Uncertain Deadline – It is very obvious that you will not be able to set a certain project completion deadline with your outsourcing partner, in case you pick this pricing model.
• Undefined Budget – Again, estimating the final project cost is almost impossible in this type of contract.

What’s Better?

We understand that the choice between fixed-rate vs hourly rate can be overwhelming. But if your hired virtual employees are experienced and professional, the chances of your product’s success increase manifolds irrespective of the pricing model you opt for. So, choose your remote IT service provider wisely!