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Development Decisions – Fixed Price or Flexible Price Contracts

by FMS Team

01.06.2018

Decisions

Full Metal only offers fixed priced contracts for small projects. 95% of our work is done under a hourly rate contract and that makes a lot of sense when it comes to developing software. In this post we look at some of the reasons we, and our clients, prefer this method of paying for work.

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?

The 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.

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. At Full Metal we like to treat our project estimates at the start as a target to beat. Sometimes we do and sometimes we don’t but at all times we know why we are ahead or behind. We track our projects in a very detailed way and always keep our client up to date.

Which is best for my Project?

As a rule of thumb only small software development project fit fixed price contracts. They have less risk of taking longer than expected and tend to be very well defined and much easier to quote for.

Everything else is better suited by the flexibility of a hourly rate contract. This is especially the case in new software that needs a lot of changes made as new parts are developed and tested. In fact the biggest benefit with an hourly rate contract is the flexibility it offers the developer and the customer

Summary

Don’t automatically go down the route of fixed price development, it might not always be the best for your project. In fact in most cases it will not be the right decision. What you should concentrate on is getting the most accurate budget for a project in place and that requires eliminating the unknowns. The best way to achieve this is a very detailed Software Requirements Specification.

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