Pricing models for outsourcing software development
Outsourcing software development is an increasingly common practice in the technology industry. Companies of all sizes are turning to outsourcing to leverage the talent and experience of external development teams, reduce costs, and speed time to market for their products.
When considering outsourcing software development services, it is essential to understand the different pricing models available. In this article, we will explore the most common pricing models used in outsourcing software development.
1. Fixed Price
The fixed price model is one of the simplest and most widely used models in outsourcing software development. In this approach, the client and supplier agree on a fixed price for a specific project before work begins. This price is based on a detailed estimate of the project requirements and scope of work.
“Fixed-price contracts stipulate what will be provided and how much will be charged for it. These contracts are typically not open to adjustments or changes, although the contract may also include circumstances under which something may be changed and stipulate requirements for that change, such as additional charges. Change requests may be required for anything outside the scope of the original agreement”, they noted on the Tech Target portal.
* Advantages
Cost Predictability: The client knows exactly how much the project will cost before it begins.
Simple structure: Pricing is based on a clear estimate, making budget planning easier.
Meeting deadlines: Since the scope is defined, it is easier to set realistic deadlines and meet them.
* Disadvantages
Little flexibility: Changing requirements during the project can result in additional costs and delays.
Shared risk: If requirements are underestimated, the supplier may incur losses.
Less adaptability: Not suitable for constantly evolving projects or with changing requirements.
2. Price per Hour (Time and Materials)
The hourly pricing model, or time and materials, is based on the time and resources used in the project. The customer pays the supplier for the hours of work and materials used. This model is flexible and adapts well to projects where the requirements are not completely defined from the beginning.
* Advantages
Flexibility: Changes in requirements can be easily incorporated without changing the contract.
Adaptability: It is suitable for projects where requirements may evolve over time.
Control: The client has greater control over the process and can adjust direction as necessary.
* Disadvantages
Lack of cost predictability: It is difficult to predict the final cost of the project as it depends on the work hours and resources used.
Possible overspending: If not managed properly, the cost of the project may exceed the initial budget.
Greater administrative complexity: Requires constant monitoring of hours and costs incurred.
3. Price per Function Point
The function point pricing model is based on the complexity and functionality of the developed software. Function points are used to measure the size and complexity of the system, and a price is set per function point. This model is based on an estimate of the size and complexity of the project.
“It starts with breaking down a project or application into its data and transactional functions. “Data functions represent the functionality provided to the user in addressing their internal and external requirements in relation to the data, while transactional functions describe the functionality provided to the user in relation to the processing of this data by the application”, they explained in the Global Journal of Computer Science and Technology Software & Data Engineering.
* Advantages
Objective approach: Function points provide an objective measure of software complexity.
Greater transparency: The customer can easily understand how the cost is determined.
Adaptability: Allows flexibility in requirements and changes in project scope.
* Disadvantages
Software Metrics Experience Needed: Requires in-depth knowledge of function point measurement.
Challenging Initial Estimates: Estimating function points accurately in the early stages of the project can be difficult.
Requires agreement on complexity: There may be disagreements on evaluating the complexity of functions.
4. Deliverable-based Pricing
In the deliverable pricing model, cost is based on the delivery of specific elements or milestones of the project. The customer and supplier agree on a price for each deliverable, such as a complete software module, and are paid when it is successfully completed and delivered.
“When we look at pricing intelligently, I think it's better to sell things: results and deliverables rather than marked time and materials. Deliverables can be flexible. They can be exchanged and changed. They can be established with clear definitions, KPIs and times and reward efficiency”, they detailed in an article in Ad Tech Daily magazine.
* Advantages
Results-oriented approach: The client pays for specific results and not for time or resources.
Greater control: The client can monitor progress as deliverables are delivered.
Facilitates planning: Clear milestones allow for better project planning and monitoring.
* Disadvantages
Greater management complexity: Requires close monitoring of deliverables and delivery times.
Risk of disagreement: There may be disagreements about whether a deliverable meets agreed criteria.
Less flexibility: Changing requirements after defining deliverables can be complicated.
The choice of pricing model for outsourcing software development depends on the nature of the project, clarity of requirements, and customer and supplier preference.
Each model has its advantages and disadvantages, and it is important to carefully consider which one is best suited for your specific needs before embarking on an outsourcing software development project. The key to success is clear communication and a solid contractual agreement that clearly defines expectations and expected results.
About Rootstack:
At Rootstack, we strive for excellence every step of the way. We provide high-quality technology and software outsourcing services and create outstanding digital experiences. Together with an expert team of creatives and engineers, we help companies in Latin America, the United States, and Canada, like Hyundai, Caterpillar, Heineken, WPP, Global Bank, and The Vitamin Shoppe.
Our company is integrated by highly qualified professionals, and we have +10 years of experience building ecosystems of solutions that revolutionize every business and transform it from its core. We want to promote comprehensive digital transformations that impact the world around us across all industries.
- We operate in the United States and Panama, also in Colombia and Mexico.
- Now we are +100 collaborators in different countries of the USA, Canada, and Latam.
- We are constantly learning new technologies to offer the best to our clients.
Details
September 19, 2023
Rootstack LLC
Name: Corporate Office
Phone: +1 215-883-4359
Email: sales@rootstack.com