A Complete Guide on Software Development Pricing Models

The success of software development depends on three factors: experience of the development team, strong project management, and a suitable printing model. However, businesses often fail to pay proper attention to the third factor: the pricing model. 

A suitable pricing model balances your timeliness, quality, cost expectations, and the software development company’s prices and operational efficiency. 

This guide provides a detailed analysis of the four key software development pricing models: Fixed Price, Time and Material, Dedicated Team, and Mixed pricing. It also explains when each model is best used and discusses its advantages and disadvantages. 

Before we dive into the details, let's first understand the factors affecting the cost of software development. 

Factors affecting the cost of custom software development 

The Project Team  

The size and experience level of the team working on your project can significantly impact on the overall cost. Projects requiring large teams or those with more senior-level resources typically have higher fees. Additionally, if the project demands specialized skills or training the cost will be higher. 

Project Scope and Complexity 

The number of features, modules, and overall functionality required for your software correlates with the development effort and costs involved. A simple website with a single contact form will cost less than enterprise software that needs multiple integration and data analytics.  

User Interface and Experience  

Suppose your software requires a highly customized user interface or a strong emphasis on user experience through research and testing. In that case, it will involve additional design and development resources, thereby increasing the costs. 

Technology and Expertise 

Complex application development requires experienced engineers in fields like machine learning and robotics, which affects the cost. Similarly, if your project involves migrating data from legacy systems or transitioning to new platforms or technologies, you will need developers well-versed in old programming. Such programmers are in short supply, leading to higher development costs. 

Platform 

The platform for which you require the application also affects the cost. Apps are usually built for iOS, Android, and Web. The languages, APIs, and Software development Kits used in development for each platform are different. If you want your application to run on different platforms, you can go for cross-platform application development. This will again affect the cost of your project. 

Project Security Level 

With the increasing threat of cyber-attacks, companies are becoming more vigilant about cybersecurity. Plus, with data protection laws like HIPAA and GDPR, it has become more crucial for any business to secure the valuable data it collects. 

This is why your business must conduct detailed research on which regulations apply to your industry and include that information in your project requirement. 

Outsourcing Partner Location 

Developers' hourly rates vary not only based on experience but also location.  For instance, the hourly rate of developers in countries like the USA and the UK will be higher than in India. 

Additional Expenses  

Beyond the core development work, there may be supplementary costs that some companies can charge. This includes software license charges that developers need for software development. Some may also charge for hosting infrastructure setup. The fees also include the charges for ongoing minor maintenance and security updates. Some companies will also increase the charge if you have a tight project deadline. 

Apart from this, your involvement in the project will also impact costs. If you have done all the research and have a minimum viable. Also, the cost is reduced if you bring your project manager or want to take care of maintenance. 

Now that you know what factors might impact the cost of software development, let us understand in detail the most prevalent software development pricing models. 

Software Development Pricing Models 

The requirements for software development are not equal for all companies. Some require developing new software from scratch; some need software improvement services, some need software integration into existing businesses, and some need web development services. 

This challenges a software development company to charge each of these requirements appropriately. The software development pricing model helps with this challenge. 

A software development pricing model is a systematic structure that helps determine how the cost of software development is calculated and presented to clients with complete transparency. 

There are four main types of software development pricing models  

• Fixed price  
• Time and Material 
• Mixed 
• Dedicated team pricing model 

Let's explore them one by one. 

Types of Software Development Pricing Models 

Time and Materials (T&M) Model 

As the name suggests, this model charges customers based on the working hours of developers (80-160 hours a month) and the material used for the development. The cost is calculated based on the hourly rate of each developer in the team. 

Most software development contracts today are based on this model. This model is best if you haven’t planned everything. For example, you can ask the team to do the same if you want to add a new feature to your software. This is not possible in a fixed-price model.  

Developers are entirely dedicated to your project and cannot work on other projects using this model.  

When to use 

• The requirements for long-term projects may evolve over time (2-3 months). 
• Research and development initiatives with uncertain outcomes. 
• Proof-of-concept projects or when exploring innovative technologies. 
• Startups with evolving product ideas and changing requirements  
• Quick start without the requirement of detailed documentation and technical needs. 

Best For 

• The T&M model works best for projects where flexibility to accommodate changes is crucial. 
• It facilitates agile development methodologies and iterative processes very effectively. 
• You should consider the T&M model in scenarios where the effort cannot be accurately estimated upfront. 

Advantages

Flexibility 

This is the most flexible pricing model of all. In this model, the entire development process is divided into small, manageable increments called sprints. This allows your business to take as much time as necessary to consult, incorporate new features, and remove unnecessary features. Plus, you can also increase or decrease the team size as needed. 

Control and transparency 

In this model, you only pay for the actual work done. As in this model, you can easily monitor the project stage. You can always text the product to ensure it meets all your requirements. 

High Quality 

As you are involved in the entire development process, you can make adjustments as the project progresses. This ensures that the final product lives up to your expectations. 

Quick start 

 In a fixed pricing model, you must have every detail before starting the project. However, in time and material model, the planning is not as long as in the fixed pricing model. Plus, the developers you need are already available from the vendor, leading to faster project initiation. 

Minimal risk 

In this model, the vendor usually bears the risk. However, since you are completely involved, you can make changes whenever you don't find the work satisfactory. In fact, you can change the entire team if you don't like the quality of work without any losses. 

Monthly payment

As the cost is not decided initially, you can pay monthly based on the work done. So, you don't have to bear the cost of entire software development at once.  

Disadvantages

• You cannot set strict deadlines in this model.  
• You need to be more involved in the software development process  
• The total cost for you as the client remains unpredictable. 
• You need to invest effort in monitoring and controlling budgets under this model. 
• For the vendor, there may be reduced motivation for efficiency since more hours translate to higher revenue. 

Fixed Price Model 

In this model, a predetermined budget is set before beginning the project. The client and the software development company agree upon the scope of work, deliverables, risk, and other factors. Before choosing this model, ensure that you and the vendor have complete knowledge of the project requirements and that you are aware of each other’s skills. The billing in this model also includes the timeline of what needs to be done and how much time.  

However, if you need to assign any new task between the projects under this model, it becomes a challenge as you need to create a new contract for the same. The vendor bears the risk under this model. However, the vendor may charge you more than usual while keeping the risk in consideration. 

When to Use

• You should use the fixed-price model for projects with well-defined and stable requirements. 
• When there is a low probability of significant changes to the project scope.  
• When working with an experienced development team. 
• Small and short-term projects like MVP (Minimum Viable Product) or PoC (proof of concept) 
• There is no need for significant management from the client’s end 

Best for 

• The fixed-price model works best for projects with precise technical specifications and thorough planning. 
• It is ideal for clients who prioritize cost predictability over flexibility. 
• The model is well-suited for short- to mid-sized projects with minimal ambiguity.  

Advantages 

Fixed budget

You decide the entire fee and the delivery date at the beginning of the project. Vendors cannot charge additional fees without notice. 

Easy management

As everything is planned and decided at the beginning of the project, you don't need to constantly supervise or manage. 

Predictable 

As you discuss everything at the start, there are no surprises. You can easily monitor whether the project is going in the right direction and according to the timeline. 

Negligible risk 

The vendor bears all the risk if the cost exceeds the initial decided cost. You don’t have to bear any risk related to cost.  

Defined expectations 

Both the vendor and the client have clear expectations from the project. They know when to deliver what and how. 

Disadvantages 

• The model lacks the flexibility to adapt to changing requirements or scope creep during the project. 
• There is a potential for quality compromises by the vendor to meet the fixed budget constraints. 
• You may face the risk of unrealistic expectations if you're planning, and estimation efforts are inaccurate. 
• It becomes challenging to keep up with changing market trends.

Dedicated Team Model 

The dedicated team pricing model is perfect for companies looking to expand their software development capabilities quickly. This model allows businesses complete control over the team members they work with, including the ability to monitor and interview each member. 

Unlike an in-house team, this model removes the burden of hiring and training new employees. Instead, you get an experienced team ready to deliver services immediately. You pay the monthly salaries of the team members, just like regular employees, but without the administrative overhead. In a dedicated team model, you are billed for the time the team spends on your project. 

When to Use the Dedicated Team Pricing Model 

• You want to influence the development process and monitor the team first-hand directly. 
• You prefer to manage the scope of work and budget yourself throughout the development process. 
• You want to personally build and get acquainted with the team working on your project. 
• You need to fill specific expertise gaps within your existing team 
• You aim to reduce overhead costs for office rent, equipment, employee taxes, and bonuses. 
• You must quickly assemble a development team, which can be challenging when setting up an in-house team. 
• You are still determining the final functionality and seeking high project flexibility. 
• You want continuous insight into the latest progress in project development and a clear understanding of what you are paying for. 

 Process of Hiring a Dedicated Team 

• Request Submission: You send a request outlining the job positions, the number of professionals needed, and a brief project description. 
• Candidate Selection: Based on your requirements, the contractor provides a list of engineers, their CVs, and availability. 
• Interviews: You select preferred candidates and conduct interviews to assess their technical and soft skills. 
• Contract Signing: Once a suitable match is found, you sign the contract prepared by the contractor. 
• Project Commencement: The remote engineer or the entire team joins the project and starts working on prioritized tasks in compliance with the project processes. 

For more information read: A Guide to Dedicated Team vs. Extended Team 

Advantages 

Total Control

You review CVs, conduct interviews, choose the team composition, and decide whether to scale the team up or down. 

Reduced Administrative Work

You avoid duties like handling onboarding, holidays, sick leave, and vacations, which makes it feel almost like hiring an in-house team without the administrative burden. 

Project Understanding

The dedicated team spends all their time on your project, leading to a better grasp of its requirements and goals. 

Disadvantages 

• You control budgeting, workflow management, motivation, and project completion, requiring more management time. 
• This model is generally the most expensive compared to other models, as it involves monthly payouts covering salaries, administrative fees, and other costs, making it practical only for long-term projects. 

Mixed/Hybrid Model 

A hybrid model is a pricing model that combines the best features of both time and material and fixed pricing models. If you choose this model, you can set a fixed cost based on estimation. Then, you can make changes and adjustments as the process proceeds. It offers a balance of price and predictability.  

Under this model, the project is divided into phases, each with a fixed timeline and price. Any addition to the project is tackled as a tie and material pricing model, which allows you to adapt to changing market trends. 

When to use: 

• This is for projects with distinct phases that have varying requirements. 
• A single pricing approach cannot address all the needs of your project. 
• Long-term engagements where the project scope is likely to evolve. 
• You need the ability to scale project requirements up and down as needed 
• A mix of well-defined core features and potential for additional changes   

Advantages of the Hybrid Model 

• Budget Predictability: The fixed-price scope gives the client a clear understanding of costs for the core project deliverables. 
• Flexibility: As needed, the T&M component allows for changes, additions, or project scaling. 
• Potential Cost Savings: If the project takes less time than expected or requires fewer features, the client may pay less than a pure T&M approach. 
• Risk Sharing: The model distributes risk between the client and the development team. 

Disadvantages of the Hybrid Model 

• Defining the fixed-price scope and managing the T&M portion requires more coordination and communication between the client and vendor. 
• The client may not have complete visibility into the time and materials used for the variable portion of the project. 
• Disagreements can arise around what constitutes the fixed-price scope versus the T&M work. 
• Upfront negotiations to agree on the fixed-price scope, budget, and timeline can delay the project kickoff. 

How to Select the Best Software Development Pricing Models? 

If you have an existing in-house team, then you may only need add-on expertise. However, a startup may need an entire team with QAs, designers, developers, and project managers. Consider all these when deciding on the model.  

Scope 

The level of your research and the details you have, can impact the choice of pricing model. If you have a detailed analysis of what you need and in what timeline, go for fixed mode. However, a time and material or dedicated model is better if you still determine the scope and want to add things gradually. 

Your Goals 

If you just need an MVP, go for a fixed model. However, if your goal is to maintain your existing software or build an entire enterprise-level software from scratch, you may need a dedicated model.  

Timeline 

Think of how long it will take for your project to complete. If it can be done within a month, go for a fixed model. However, if you are unsure about the timeline and think it may take time, go for a time and material model. 

Budget  

If you have a fixed budget for the development, choose a fixed model. However, if you want to pay monthly rather than altogether, you can go for time and materials or a dedicated model. 

Control over project 

A fixed-price model requires low client involvement because everything is decided beforehand. However, in a time and material-advanced model, your involvement will increase.  

Things your software development pricing contract should include 

The first thing is the service that you expect from the vendor. This section should contain all the details, like the scope of the project, the process, and additional information to avoid disputes between you and the vendor.  

The time and cost of the project. Make sure this is as descriptive as possible. It must also include a section that states the consequences of both parties missing the deadline. 

The type of testing that the vendor will perform. 

The contract should clearly state the developed software, including source code, wireframes, designs, and plans. This section must specify that the development company can reassign only the rights to the created software while open-source components remain public. 

The contract should include a confidentiality section to protect the project's information stored by the development company. Most software development contracts contain confidentiality provisions that continue to be enforced even after the contract ends. 

Final Words 

The right pricing model for your software development project depends on your specific needs and priorities. As a leading software development company, we don't believe in a one-size-fits-all approach. 

Our team works closely with you to understand your project requirements, budget, and business goals. From there, we can recommend the pricing model that makes the most sense. We can be your helping hand throughout the entire software development process.