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Posted on February 6, 2012

Fixed Price vs. Hourly Rate

Every company has its own preferences regarding working and payment methods. There are two typical options: an hourly rate or a fixed budget. Both methods have their own advantages and disadvantages and choosing a more appropriate approach depends on many things including experience, the project itself, etc. We often try to be very flexible with our clients and make a decision based on project conditions and requirements and client’s preferences. offshore centre . In this post we would like to explain how to choose right and outline things you need to consider and discuss with your customer in advance.

Fixed price

In our opinion, this method is most common for low-budget projects (<$10,000). This option seems optimal from the client’s perspective, as they know their bottom line. Plus the client clearly understands what exactly they will get as a result. However, this approach has some significant drawbacks:

  1. The project start can be a bit delayed because of preparing all necessary specifications. They must be very detailed so that the other party can accurately estimate labor costs. On the other hand, it can save you from ambiguity at later stages.
  2. Such project pricing assumes that the requirements will not be changed during the development phase. This is a significant disadvantage since in most cases the client comes up with new ideas while examining the prototype, getting feedback on it from focus groups, etc.
  3. Fixed prices may sometimes lead to conflicts and tensions in relations. Though clients are aware of the budget, they often keep on requiring changes to be done emphasizing their importance.
  4. The team’s creativity is limited due to the proposed scope and budget.
  5. If under constant pressure of change requests, the team stops thinking about the project itself and starts thinking more about changing the timing and the budget.
  6. From our point of view, this billing approach requires too much micromanagement and thus eliminates flexibility.
  7. In addition, the client can’t own the code & copyright before the full payment is made and thus can’t do code reviews themselves, test a prototype in their own environment, etc.
  8. Finally, this approach may turn out to be more expensive because the vendor will try to cover potential risks by adding extra hours.

Remember that no estimation is usually done without error that’s why someone has to lose in case of a fixed budget.

If the project has been underestimated, the vendor loses money, if it takes less time than stated, the client is overcharged.

Hourly Billing

This approach is most likely to be favored by clients with experience. In our opinion, quite a large amount of clients are switching to this method after trying to work on a fixed budget. In this case the client is billed for the actual number of hours spent. If there are additional requests – you pay more, if something is done more quickly – you pay less.

Pros:

  1. The team works closely with the client and always discusses all possible scenarios for achieving optimal results. There is enough space for creativity, less formality and bureaucracy.
  2. The client takes control over the budget, may add new features, simplify existing requirements or jump to the next production phase to meet the deadline.

Cons:

  1. Flexibility may act as a disadvantage as well. Though each task and release are estimated in advance, the client should understand that any time the project may require additional infusions of funds.

We definitely prefer the hourly based model and have utilized it for most of the projects we’ve been involved into. It ensures all the client’s requirements are satisfied while the team has room for flexibility and creativity.

The best project we worked on was actually rewritten a few times and refactored with features added and removed multiple times. Ultimately, the result even exceeded our expectations and totally made up for the client’s investments which would have never happened if the project had been on a fixed budget.

Judging from our experience, we can state that clients like flexibility in general, but when it comes to working with a vendor for the first time they like to be on the safe side and set fixed pricing.