Custom Software Pricing - Hourly vs. Fixed

If a fixed price or hourly engagement the best for your project?

Hourly vs. Fixed Price

In an hourly engagement, you are billed for the hours worked, usually every two weeks or monthly. The rates you are charged will vary by company, and even by role. You might pay $75 per hour for a project manager, and $100 per hour for a .NET developer. In a fixed price model, you and the software team you hire agrees to a fixed price for a fixed set of requirements. In theory this is pretty straight forward. You tell the software team what you want done, and they quote you a price. Keep reading.

Understanding the Pros and Cons

The advantage of an hourly rate engagement is that you only pay for the hours worked, and you can usually change directions, if needed, without dealing with re-bidding. The negative to the hourly model is that if you hire the wrong team, you could be paying for hours that were not worked. But if you did hire the wrong company, you have bigger problems. The advantages to a fixed price are that you know the final cost and can decide if your budget allows it. The disadvantage of a fixed price engagement is that no software project in the history on man has ever come in within budget. Why is that? Basically, you don't know everything you need to know about your project. You are going to miss things, and every time one of those items comes up, your fixed bid goes out the window. A fixed bid engagement very quickly turns into a "whatever we want to charge the customer" type of agreement. This is not to say that the software team is being deceptive. If you ask them to do 10 things, and that list grows to 15, they are going to charge you more.

Which Model Is Best for Your Project?

If your project is very simple, and by that I mean less than 40 to 80 hours of effort, a fixed price can make sense. The reason is that the risk is low enough that if the software team underestimates the effort, they are most likely going to just eat the loss. If, however, we are talking about a multi-month project, an hourly engagement is most likely going to be your best bet. First, we don't know of any reputable software development company that charges on a fixed price basis. We all know the deal. Requirements change. Priorities move around. The client doesn't really know what they want coming in. So slapping a label of "fixed price" on a quote when we know this is never going to happen is considered unethical by many companies, including MyProgrammer. Unfortunately, many people find this out the hard way.

Which Pricing Model Do We Use?
Custom Software Developer Rob Carr

Rob's Take

The fixed price vs. hourly model debate has been going on for a long time, and today most established companies have gone away from the fixed price model. If you want to ruin a budding relationship, the easiest way to do it is to slap a fixed price onto it. If I tell you $50,000, you are going to make your decision based on that quote. You might not have a lot more than that set aside for the project. When your project turns into $75,000 or $100,000, I have a strong feeling I am not going to get a Christmas card from you that year. Is that my fault that you didn't know what you needed? Yes, and no. If I told you $50,000 without clearly explaining to you that this is just an estimate, then I bare some responsibility. In any case, I just prefer not to frame the discussion around a fixed price. Let's talk estimates, and then work together to get the project done within your budget.

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Charleston, South Carolina

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Los Angeles, California

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Bend, Oregon

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Delmar, New York