Fixed Bid vs. Hourly Bid

Blog / Business Thoughts and Ideas / Fixed Bid vs. Hourly Bid
9/30/2019 | John Paull
Software development projects are famous for holding a high flop rate. In the context of this paper, "flop" is defined as "not meeting the expectations, requirement, and specifications of the project owner." Flop in this context also include other failures such as the inability of the final project to function in the proposed way as specified in a requirements documents, not attaining the expected performance standards, going too far over budget that may lead to cancellation of the project, or possessing so many glitches that the end-users find the system not appealing.
In the field of software development, there are mainly two approaches to planning a project. The first approach tackles the project plan as a predictive tool, a lead to what we can logically expect to happen given where we are now and given the present state of our knowledge. Using this approach, the project plan is a living document. When reality veers too much from what we had projected, we alter our plans in order to keep it realistic. The other approach, on the other hand, treats the project plan as something more like a set of commandments, a binding contract whose timings must be adhered to. Taking this second approach, reality is forced to conform to the plan, come what may.

For software owners, setting a fixed cost for a project seems to be a reasonable decision - you know how much you will pay beforehand. But that is only on the surface. Agile software development firms view fixed costs as a problematic way of establishing the price for a software project. The fixed cost method is a stalemate condition bearing unwanted risks to both participants. The significant shortcomings for app owners are the average quality of the final product and the eventual overpays. How can that occur?

 

Fixed Bid versus Hourly, Which Should You Use

A software development project is not a static process, and obviously, software owners cannot get an accurate cost. Estimation is a vital way to set the value and required time. Accurate specifications will maximize the accuracy of the estimate. But during the course of the development of a unique software, no one can tell precisely how much time some features may take. Being a highly original product, custom software is an innovative piece of work. The fixed cost strategy doesn't work here, and it can be dangerous for the software owner for the following reasons.
Overpays
The fixed cost approach is a disputable way of balancing risks. It is a seeming advantage for the software owners when developers take financial risks; they are not able to take advantage of protracting the project. All these responsibilities work as a motivation to get the project done. But the fact is everyone wants to protect themselves from any losses. This leads to the inclusion of likely risks in the fixed cost. This is the first move towards overpays.
As opposed to a fixed price, the hourly rate approach is more suitable to the essence of agile development. Here the developers get the incentive of producing a high-quality end product, while the software owners get comprehensive reports concerning the time spent (which means money spent). By a fixed cost approach, usually, neither of these benefits are achieved.
 

Inflexibility

Experience confirms that software owners always tend to increase requirements during production. That has always been and will continue to be. Agile development consists of iterations, which enhance the software product with the required features. Every iteration has a working piece of tested software as an outcome. That's how the owner of the software receive and try the output of the developer work. After examining the product, software owners continuously come up with new ideas and features. An agile approach gives the possibility of applying feasible changes in the functionality of the project with minimum losses.

On the contrary, fixed cost cuts off this chance. Even if estimations always include additional time for possible complications, more time is spent on these changes, which leaves less time on further improvements. Here software owners lose on the product, which might lack abilities for the vital support after deployment. Therefore this support will require more investments, which lead back to unwanted overpays. However, with hourly rates, you can quickly get this fixed

 

Lower quality

The goal to dodge risks attached with a fixed cost and its deadlines might negatively influence software products. They are designed to be acceptable instead of being high-quality products. What's the difference? It is quite simple - while creating a high-quality output, developers usually delve into its core. They figure out vital details and make recommendations, which software owners may or may not approve. The fixed cost might leave no opportunity for that, and the acceptable product is produced strictly according to the agreement and specifications. If the software owners do not need any changes and are satisfied with the agreed budget and functionality, then fixed cost may work. But vital advice may be entirely left out.
 
This is how it becomes apparent that the development of software can not entirely rely on the fixed cost strategy. However, what if the software owner has a fixed budget? What if there is a sum that cannot be exceeded? This may help the abovementioned agile way of iterations. The scope of work is projected to fit into the limited budget, with the possibilities of suspending a part of the functionality for later releases. As a result of that, the software owner receives a high-quality product to try out in the market, with the opportunities of further functional enhancements and support.
The issue of pricing in choosing a developer is those of costing methods and charging for changes. Avoid firms that impose hourly rates without defining the amount of time that the project will take. An excellent developer for the task should be able to provide a reasonably accurate cost estimate that constitutes fixed charges, provided that your requirements have been thoroughly and clearly documented. However, you should be prepared for possible added costs during the development process if alterations are needed (this is a regular occurrence). Changes cannot be predicted, but you need to understand the developer's means of charging for changes and how he intends to deal with any changes (this should be stated in a contract).