Software Development Blog

Development Decisions – Fixed Price or Flexible Price Contracts

Full Metal Software offers contracts based on a price per day or a fixed price for the whole project. Do you know how many flexible pricing contracts we send out? None, everything has been done on a fixed price contract basis. It makes a lot of business sense for a number of reasons, such as budgeting for projects or even working out the value of doing a development project in the first place but is it always the best decision?

Who is Taking the Risk?

Before we delve into some of the best fits for each type of contract we first have to talk about risk and how that is built into each type of contract. With a fixed priced contract you are putting the risk of budgeting the development project on the developer’s shoulders. That is fine, they are the experts in development and they are best placed to cost a development project. In the real world though risk needs reward and developers will typically do this by building in margins of safety in their timings and quotes.

In a flexible priced contract that risk is on the company wanting the development work to be done. Quotes are not set in stone, only the price per hour is. The developer gets paid for the work they do and the customer takes the benefit if that takes less time and the consequence if it takes more time.

Is Fixed Price really Fixed?

Simple answer is no. Fixed price contracts are fixed within the scope of the project as it has been defined (normally in great detail in the contract). Nearly any fixed price contract will have a change request mechanism built in to it, whereby if the customer changes their mind on some part of the project the developer has the right to supply a new price for that change to take place. This is not limited to software development, all industries where fixed prices are common will have a way of dealing with changes.

This shouldn’t be worded as a penalty clause. It should be a mechanism for quoting for the difference in cost from the original requirement to the new requirement. In fact the developers may use it in your favour if they think of a way of making the project cheaper (or improving a feature) they should quote for the difference under this term in the contract. Also it is unlikely that developers will utilise that clause for tiny changes, they are always expected as part of any development project.

Doesn’t Flexible Pricing Mean there is no Onus on the Developer to Finish?

The first response to that is that a development company that drags its feet to make more money is not going to be in business long. Their reputation would be dreadful. If you are still worried then either put a carrot or stick in the contract. An example of a carrot would be to put in a bonus if they come in on time and on budget or alternatively split the savings if they come in under budget. An effective stick would be to weight payments for the work more towards completion.

Which is best for my Project?

As a rule of thumb these fit in well with fixed price contracts:

Small Projects:
Small development projects have less risk of taking longer than expected, they and therefore easier to quote for and fit well with a fixed price contract.

Defined Projects:
When the project can be defined in detail, either by you or the developer, it is a good idea to go with a fixed price contract.

Phased Projects:
When a project can be broken down into sensible phases or versions then you can proceed with a fixed price contract on bigger projects. This is about making the project multiple defined and smaller projects. Each phase would get its own fixed price. This also works when later phases are not yet defined, just ideas of potential future requirements.

It is often better to use flexible pricing for larger projects that cannot be defined clearly or split into phases. Startups are a prime example where there are often a lot of unknowns and changes are required often and quickly throughout the development process.

Summary

Don’t automatically go down the route of fixed price development, it might not always be the best for your project. Talk to your developers about it and they will point you in the right direction. In most cases fixed prices will be the correct decision for your company and software developers love well defined projects, so it is a great fit for both parties.

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