When a client decides to hire a software development provider, they have to sign a billing contract and choose a pricing model of cooperation. The most common ones are Fixed-Price and Estimate (also known as Time & Materials). Choosing one or another depends on the type of project. In this blog post, we tell you which of them is best to use and when and look at their advantages and disadvantages. 

The first important thing you need to realize is that Fixed Price and Estimate pricing models are not the same things. Their only common feature is that they are very popular models in software development contracts. The main difference between them is that: 

  • Fixed Price is an agreed quotation that can’t be changed once accepted by a client in the agreement 
  • Estimate is the approximate price that may change depending on the changes in the project scope 

Type of Project 

A Fixed Price model is best for: 

  • Small projects with limited features and clear requirements 
  • It requires long planning before the project start 
  • It includes determined deadlines 

This approach is best if a company wants to create for example a simple Minimum Viable Product (MVP) with a clearly defined set of features.  

Estimate works better for: 

  • Larger projects with dynamic requirements and unclear project scores 
  • Less planning at the beginning is required as both sides assume that requirements may change during the project  
  • Also, deadlines are uncertain 

A more complex MVP, consisting of several iterations, is an example of a project for which an Estimate pricing model should be applied. 

Control Over the Price 

In Fixed Price-based projects a client has: 

  • A clearly defined budget 
  • The price is usually calculated with a certain margin in case of unexpected problems in the project 

In Estimate-based projects: 

  • The final price is known only after completion of the project  
  • Nevertheless, clients have continuous control over the budget and they only pay for the work performed 

Client Engagement 

In Fixed Price-based projects: 

  • Results are known at the start of the project 
  • There is little to no management required from clients 

In Estimate-based projects 

  • The result is only envisioned at the start of the project  
  • Both sides assume that requirements may change  
  • Thus more attention from clients is required 

Flexibility 

With Fixed Price projects there are: 

  • Lack of flexibility 
  • All additional features are priced separately 

In the case of Estimate projects, there are: 

  • Great flexibility 
  • Modifications to a project can be introduced at any time 
  • This ensures that results will be fully aligned with actual needs  

 

  Advantages  Disadvantages  When to Use 
Fixed Price 
  • Finalized price 
  • Strict deadlines 
  • Predictability 
  • Little to no management 

 
  • Lack of flexibility 
  • Long planning 
  • Miscommunications risks 
  • Small projects with clear requirements 
Estimate 
  • Great flexibility 
  • Transparency in project work progress and pricing 
  • High product quality 
  • Uncertain deadlines 
  • Undefined budget 
  • Need for the client to be highly involved in the project 
  • Longer-term projects with dynamic requirements  

Clients should decide which billing model to choose depending on the type of project. If they are planning a small project with clear requirements and a limited budget, they should choose a Fixed Price model. If their project is bigger and the requirements change dynamically, then an Estimate model will be a much better choice. 

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