IT Outsourcing Pricing Models: How They Differ and What's Their Use

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21 Jun 2016
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Alina A.
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You know, there is hardly any possibility to have a full control over the operating process when you are engaged into cooperation with a remote development team. The most important thing is to discuss all the conditions of a software development contract before the project is launched. You should be clear what things you are going to pay for and which price rates are to be applied.

Mind that you don't have to reinvent the wheel and think through all the details of the payment system. There are many types of IT contracts. Your task is to sign the most suitable one.

Which Type of Outsourcing Contacts is the Most Suitable for Your Business?

Which Software Development Outsourcing Contract is the Most Suitable for Your Business?

So, it's time to find out the special features and use cases of each contract for outsourcing services.

Fixed price

Let's start with the most popular and the most efficient software development agreement. From the title, you might have guessed that it implies paying a fixed amount of money for a particular scope of work.

This is a perfect solution for short-term projects lasting not more than a few months. It is necessary that the team receives a detailed specification describing each part of the future product. You should also be clear about the options to be implemented because such contract type does not imply changing the tenor of development.

For all that, it does not mean that you are not allowed to incorporate revisions into an ongoing project. If such a need arises, you can create an additional agreement and reestimate the final price in order to effect the desired result.

Fixed Price strategy is a silver bullet for those ones who are interested in the off-the-peg product and do not care of means used for creating it. This type of IT outsourcing models assumes no active client's involvement in the workflow. The process is entirely controlled by the project manager hired by the outsourcing company.

When to choose a Fixed price model

If you are not sure whether the fixed bid is suitable for your project look at the questions below. In case you can answer 'Yes' to most of them, this is exactly what you need.

  • Is it possible to fully describe the functionality of your product and the stages of its implementation? 
  • Does the development process suppose to take not more than few months? 
  • Can you entrust the project management functions to the representative of the development team? 
  • Is it possible to agree on the terms of the workflow review? 
  • Is it unlikely that you make any significant changes to the final version of the product?
Fixed price model

Fixed Price summary

Pros and cons

Before taking a final decision, consider Fixed Price contract advantages and disadvantages. You are going to benefit for the following reasons:

  • No overpayments. The entire amount is agreed before signing the custom software development agreement.  
  • No supervision. Coordination of the development process is carried out by the project manager. If desired, the client may also participate. 
  • No turn-ups. You have a signed statement which describes the terms when a certain portion of the functionality should be implemented. 
  • No distrust. There is no need to worry whether the working hours are used efficiently. The contractor is highly motivated to deliver the quality product in the shortest terms. 
  • Low risk. All in all, you play it safe. If the product does not meet the requirements you still have the right not to pay for it.  
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Do you know everything about a Fixed Price contract? Check out an exhaustive article about the things you should know before accepting the model.

In any business there are downsides.

  • Time for preparations. Be ready to spend a few days up to 2-3 weeks documenting all the requirements and deadlines. 
  • Minor control over the process. Of course, you can make your adjustments, however, management is mainly executed by the team member. 
  • Lack of communication. This model does not involve frequent interaction between the client and team. Nevertheless, it does not mean that you will be excluded from this outsourcing contract management.

Time and Material

All the above sounds cool but what to do if you intend to launch a long-lasting project which is impossible to itemize and estimate in advance? Keep your head! At Cleveroad, we have been dealing with such products many times and know how to handle the situation. Specially for this purpose we make a heavy use of T&M model.

Unlike the fixed bid project, it does not require an advanced calculation of all the details. You pay for the hours spent on the development of pre-specified functional. Also, the client reimburses material costs (e.g., hardware) and ancillary charges (e.g., business trips).

Time and material IT outsourcing agreement is very flexible and is ideal for the long-term cooperation. At the regular meetings, the representatives of the team substantiate the hours spent on the implementation of each function and explain the specifics of the development.

As a rule, the final stage implies the delivery of a finished product in the form described by the customer. However, the exact timing of the execution is not possible to stipulate in advance due to the nature and specific of the software.

When to choose a Time and Material model

To be sure that you make a right choice by signing the T&M contract, try to answer the following questions. If affirmative answers prevail, this is a sound decision.

  • Is the project concept rather raw to estimate all the details precisely? 
  • Do you need a great flexibility during the process of development?
  • Is your idea connected with the new technologies and not completely built up markets?
  • Are you intended to provide a direct control over the project and supply your team with the specific materials?
Time and Material model

Time and Materials summary

Pros and cons

Weigh the benefits and drawbacks before making a final decision on what kind of outsourcing services agreement to choose. The T&M project upsides are going to be as follows:

  • Flexible budget. You can negotiate with the team on the question of the relevance of particular features and ways of their implementation taking into account your budget possibilities.
  • Part-payment opportunity. The total amount will be split for you to pay it step by step for each completed piece of work. 
  • Easy start. There is no need to sound the final requirements so you can directly proceed to the development process. 
  • No costs for preparations. There is no need to make any pre-arrangements. All the discussions will be considered as a part of the workflow. 
  • Agile. Outsourcing contracts that follow T&M model perfectly cohere with the Scrum methodology, in particular, such elements as a sprint, daily and retrospective meetings, etc. 

Speaking of the disadvantages, pay attention to the following items:

  • No deadlines. In fact, you are not exactly aware of the time when a finished product will be delivered. The timeframes are quite blurry.
  • Low budget control. Even though each segment of work is discussed you do not have a full imagination of the final sum you are going to pay. 
  • Time for participation. Since you will be directly involved in the management of the project, be prepared to allocate time for it.

Dedicated Team

Working under this custom software development contract, you get a team that is only concerned with your project and not engaged in any other tasks. It knows the main idea which it seeks to achieve and performs intermediate tasks on behalf of it.

In this kind of outsourcing pricing models, it is hard to describe the closing stage of collaboration since it may vary depending on the specific of the project. The remote developers become full members of the client's team, follow its corporate culture working for the benefit of the company. Therefore, the customer may eventually change the direction and entrust new responsibilities while not ceasing cooperation with the outsourcing company.

It should be noted that the role of the latter is reduced to a minimum after the team is formed. The client manages the process and makes decisions on the project development by its own. An outsourcing company can only assist in certain organizational moments.

When to choose a Dedicated Team model

If you hesitate whether DT software development contract agreement will serve you, take a look at the questions below. The affirmative responses should dispel the doubts.

  • Are you going to develop a complex product rather than a simple tool? 
  • Do you want to manage the development process personally? 
  • Are you thinking of extending the business in future? 
  • Do you need a team working solely on your project?
Dedicated Team model

Dedicated Team summary

Pros and cons

And now it's time to get a full picture and summarize all the pros and cons you are going to face in case of choosing Dedicated Team model.

Let's start with the good sides, they include:

  • Straightforward communication. You will be constantly in touch with the performers to agree all the aspects of work.
  • Catch-all control. You will monitor and coordinate the work process by your own. 
  • Reliable team. You are going to work with a team that becomes a part of your regular personnel and, thus, being interested in a long and productive collaboration. 
  • Tasks flexibility. Since you don't have to specify the slightest details in advance, you can easily change certain goals and terms depending on the situation. 
  • High effectiveness. Working with the same product on a continuing basis, the team members learn it on the expert level and, thus, increase their productivities.

The limitations of the Dedicated Team model are as follows:

  • Expensiveness. Compared to other types of IT outsourcing models (FP and T&M), you are going to pay more. However, this is a relative ratio since Dedicated Team scheme is usually deployed for more complex products that are more expensive no matter which pricing policy is applied. 
  • Time expenditure. Be ready to spend some time to hire the staff of the appropriate qualification. 
  • Costs for management. You will be responsible for controlling processes and growth policy, so, be prepared to spend money in this direction.
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Check out the use case of a Dedicated Team model with a detailed explanation of all the subtleties.

So, what software outsourcing contract to choose?

As you can see, all the types of outsourcing contracts have their risks and opportunities. But which is the best one? Even with all things considered, I recommend always choose fixed pricing strategy over T&M and DT unless you have a good reason not to. The point is that such collaboration carries the least risk for the client and passes it to the team of IT experts. Entrusting your product to a remote command, naturally, you want to get maximum security.

Also, your choice should be largely justified by the type of project you are going to launch. For the short-term development with a clear description of functionality and the concept of a finished product, Fixed Price method will serve the best way. For the long-term cooperation and in case you are going to change the activity vector, choose the last two models. A brief outsource contract review is provided on the picture below:

Price models in outsourcing

Types of IT contracts in comparison

At Cleveroad, we successfully deploy all of them and deliver the dream products to orderers. Communicating with the potential clients, our specialists give a reasonable guidance on which software development outsourcing agreement is the most suitable for business development. Of course, the final choice is up to you, however, you can not worry about the validity of a given direction.

If you want to fill the ranks of happy customers, do not hesitate to take the first step. Contact our managers and open a new page in the history of your business.

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