If you have ever, or are now considering for the first time, outsourcing some software development – you’re faced with many choices. One of the most important is: Do I choose an hourly fee or negotiate a fixed rate?


It’s a tough choice to make because either option has its own set of pros and cons. In order to make the right choice, you should be aware of them all, and this article will help you by giving you a guideline to make the right choice.


Let’s look at them both now:


Fixed-price software development


The biggest advantage of this price option is obvious – you know before any work begins exactly what the charges are. You can feel comfortable moving forward because there aren’t any unknowns – or are there?


Yes, you do know what the price is going to be, but that does come with a good deal more up front work on your part. You have to carefully and accurately define the scope of the project so that your outsourced developer can give you an accurate estimate. And it’s always going to be an estimate.


The truth of the matter is that the larger and longer a development project goes – the more likely it is to run into scope drift. There are always unforeseen issues, and in virtually every fixed-price contract, there is an upcharge at the end.


So long as you’re okay with this, a fixed-rate job may still be your best option.


Indicators of when to use fixed-price software development:


• If the job is short term – perhaps 2 months or less in length.

• If the project has a clearly-defined scope.

• If you’re working with a hard budget limit.


Hourly software development


Although the most obvious disadvantage of this option is the open-ended nature of the cost – this is also one of the biggest advantages too. Why is this?


Because with an hourly price schedule, you’re not limited in scope. You don’t have to spend dozens or even hundreds of man hours in pre-project planning and you and your outsourced software development team can be far more flexible and adaptable.


Hourly pricing really lets you explore your options and create innovations during the development process. It’s far less limiting and more often than not gives you a superior final product.


Of course, you have to be prepared for an open-ended fee. This is not to say that an hourly project won’t have some price parameters – there’s usually an estimate at the beginning – it’s just that you can’t stick to this and more often than not, the estimate is not very accurate by the end of the job.


Hourly software development indicators:


• If the project is long-term – more than 6 weeks or 2 months.

• If the project is large in scope such as an enterprise-wide system.

• If the initial development concept contains vague items or requires data that isn’t available at the start.

• If there are multiple testing stages requiring Agile development.

• If the new development must also integrate third party applications – this can be difficult to lock down to an exact price.

• If the project is based on major innovations you’re trying to bring into the market.


Which option is right for you really depends on your unique situation, your budget and the overall quality you want in your final software development. One thing you can do is discuss your needs with your chosen software development outsource partner and let them guide you. Their experience is going to be invaluable in helping you make this decision.