Contract Pricing: Fixed Fee Projects
So you have an idea for a mobile app, or are in need of a web developer, or want to incorporate a new website design for your business, etc…you’ve done some research and you’ve identified a potential provider that you think is a good fit to do the work. They’ve scoped out your project, asked some questions about the requirements and have come back to you with a price and payment terms for the project. How do you evaluate it? Is the pricing structure appropriate? Are the terms negotiable?
Well, the good news is that the approach to pricing software design and development projects is pretty much the same from one provider to the next.
At the end of the day, service providers selling mobile app development and website design services primarily do it in one of two ways: for a fixed fee, or by the hour. It’s really that simple. Both approaches are appropriate under the right circumstances and both carry their own risks. A few points to consider when evaluating entering a fixed fee engagement are discussed below.
When is a fixed fee appropriate?
Fixed fee projects are just that. The provider agrees to deliver a service for a set fee. Given the inflexibility of this approach, it is most appropriate when the project requirements are completely defined up front and well documented before the project begins. If this is the case, then obtaining a fixed fee proposal should be pretty straightforward. However, when this isn’t the case, or if the project is large in scope (more than a basic website…this is more applicable in the web and mobile app world) it’s often appropriate to enter into a smaller requirements definition project first. This ensures that both parties are in complete agreement as to what exactly is being built during the engagement. The result of this requirements definition project should be a document that details all project requirements. The provider should then be able to provide you a more thoughtful proposal and fixed fee price based upon the document produced. You can then take this document and received a competing bid if you are not comfortable with the quote received.
What are the benefits?
The benefit to the customer in this model is obviously the fact that the cost is fixed, even if there are project delays, or the provider has to invest more time than budgeted. The provider has taken on the majority of the risk in this situation.
What is the drawback?
It’s not really a drawback, but you should understand that you are paying a bit of a premium to lock in your fixed fee. This is actually appropriate and gives the service provider a bit of protection in the event that unforeseen project factors cause the providers costs to increase during an engagement. At the end of the day, the provider estimated the time required to provide the service, so the risk to them is that they underestimated this effort. Thus, they will build in some margin to provide additional protection against this risk.
When is the money due?
When it comes to contract terms, expect to pay a portion of the fixed fee up front; depending upon the size of the engagement, one should expect to pay anywhere from 10% (on larger engagements) to 50% (on small engagements) up front, with the remainder tied to milestones achieved during the project. A typical milestone based fee schedule might look something like this:
- Milestone 1, Project Kickoff: 15%
- Milestone 2, Creative Design Complete: 30%
- Milestone 3, End User Testing Begins: 30%
- Milestone 4, Go-Live: 25%
What should be included?
If you are going to enter into a fixed fee contract, it’s important to reach agreement on the following (just to name a few):
- Specifically list the project deliverables (ie source code, project notes, any training, etc)
- What application platforms will be supported (ie if you are building a mobile app, is it for an iPhone? Android? Both?)
- What browsers, devices and operating systems will be tested for compatibility with the application or website?
- Specifically list any project exclusions
- If there will be a warranty period, list the specific terms (typically, a warranty period will exist when an “application” is being built)
Is the fee negotiable?
Often times, yes. All providers quote their work differently. Most are very fair and reasonable, but some are not. Interview referrals and evaluate the proposal and contract terms carefully. If you are still unsure of the project, formalize an RFP (Request for Proposal) and try to get several vendors to propose back to you to compare their responses.