March 06, 2023
In this blog post, we will discuss why hourly or daily rate contracts are better than fixed-rate contracts for software development projects both for the client and the business.
With software development theres 2 main avenues for pricing contracts. Fixed rate vs day (or hourly) rate contracts. theres a number of reasons why fixed rate doesn't work well for software development which we will go through below.
Generally our best and most successful clients understand this, however we understand that there are some bad providers out there, so you need to protect your self against this too. As if you pick the wrong software development company, theres a number of risks.
One of the main advantages of hourly or daily rate contracts is that they offer greater flexibility than fixed-rate contracts. You are charged for the time spent, rather then a padded estimate. When a dev company has to do fixed cost, you have to put in padding to take into account any unforeseen circumstances.
As software estimation is quite difficult, the padding tends to be quite large, when you present a padded estimate to a client they understandably think you are trying to pull one over on them which is detrimental to the client business relationship and brings me on to my next point.
So if you over pad the estimate you offend the client, if you under estimate the scope you put added pressure on your team, as you go over your estimate and start working for free. This puts pressure on your PM, your devs and you as a business owner.
With a fixed-rate contract, the scope of the project and the budget are determined at the beginning of the project, and any changes to the project's scope or requirements may result in additional costs or delays. You'd need to have a very detailed project scope as a lot can get lost in translation. Both as the project owner and the development team you'd be looking to clearly define your responsibilities. What may seem to be common knowledge to one party may not be to the other. It's usually very difficult for the client to very clearly define the paramaters of the scope.
Your best clients / projects work on this basis, why?
Because the best projects focus are profitable businesses and ideas, they understand that a set fee for complex technical work doesn't work as a pricing incentive and are focussed on building relationships with great individuals and teams that can help deliver their vision,
Your best software development agencies and freelancers work on this basis, why?
Because its less administrative work and pressure in estimation. Often the additional work put in to a fixed price contract estimation can go unrewarded (you don't close the contract).
It's less administrative work and pressure during the project, making it easier to deliver on your promise.
Risk: Underestimated and work not complete
I've seen it time and again where clients come to us at the end of a project with another team having not reached their requirement.
How can I protect myself?: The agency or freelancer should have a set payment plan, what we do is 50% upfront with biweekly billing. So you only pay partial amount of the upfront cost.
Then there should be a PM tool and a staging environment so you can review work done. This way you an review work at any given time in the project to see if the agency is on track with there estimates.
Lastly is you should review work often and soon until the trust is built. The responsibility falls on you to not let the project / timelines get out of control. If you end up 3 months down the line and haven't kept your eye on the project you could easily end up in a position where you've spent a lot of money and have not got the desired outcome.
In conclusion, while fixed-rate contracts may seem more attractive due to their simplicity and predictability, hourly or daily rate contracts offer more flexibility, transparency, better alignment of incentives, and cost-effectiveness for software development projects. It is important to carefully consider the pros and cons of each contract type before making a decision, and to work with a reputable and experienced contractor to ensure that the project is completed successfully.