28.04.2020Cyprian Łakomy

Software development pricing models you need to know

As software companies differ from one another, so do their pricing methods. This is how we do it.

Software development companies usually operate within three pricing frameworks:

  • fixed price,
  • time & materials,
  • mix of the two above.

Let’s take a more detailed look at them.

Fixed Price has its pros...

This one is the most obvious for clients coming from outside of the software industry. One side does the job, the other one pays the agreed price. Simple as that? Well, yes, kind of, but under very concrete conditions.

The benefits of the fixed price model are very clear. From day one you know how much an application will cost you, so you can plan your budget in strong advance. Moreover, if some of the app’s features are problematic and take more time than previously estimated, it will not alter the total costs.

At Prograils, project management & QA are included in the final cost.

Software development within the fixed price model follows a clear roadmap with subsequent features as milestones, and a sharp release date.

Given that…

You know precisely what you want. The fixed price charging model in software development works only if a business owner (or product owner after the deal is made) has done much own work in advance. What kind of work?

Entering the fixed price relationship with an agency, you have to bring your own app specification, mockups, designs, use cases and user journey maps. What’s more, you have to know precisely the application’s audience (who is going to use it) and be sure none of the mentioned factors will change over time.

In short, fixed price equals fixed requirements, which means all the assumptions and agreements in your application’s regard are almost literally written in stone.

In case you change your mind over the course of the dev process and come up with any modifications in the project’s specs, they will be the subject of a new estimation and offer you will have to accept.

Another possibility is that a software partner prepares a fixed price estimation, but significantly inflated due to the necessity of preparing the specification themselves and the possibility of the client modifying the requirements.

When is it right to think about the fixed price model?

The fixed price model leaves very little space for uncertainty and change. Meanwhile the business reality is full of variables: shifting market trends, people’s reactions, competition’s behaviors and… mere will to experiment and innovate.

This is why the fixed price model is usually applied in short-term projects. You hand over all your specifications and documents to a software shop, get an estimation and that’s it.

After you have paid the invoice, you become the owner of the code.

Common alternative: Time and Materials

Have doubts about the fixed price method? I get you. Time & Materials (T&M) is the most popular alternative to it, and the one upon which most software development contracts are based. What is it about? Follow me.

If the arrangements of the fixed-price projects are carved in stone, those in the Time-and-Materials business relationship can be changed anytime. Rather than designing everything in the smallest detail, T&M bets on flexibility in software development life cycle.

“Every long-term software project is filled with variables. Some of them are visible already at the first glance, other unfold during later phases. The Time & Materials pricing model allows product owners to react to user feedback and changing market trends, while development teams are able to address these needs immediately within the agreed budget frame”, says Maciej Litwiniuk, the Prograils’ CEO.

The Time & Materials approach makes you able to prioritize features of your application and make decisions regarding how much money you want to spend at a given development stage.

Time and Materials, siblings of Agile development

The above factors make the T&M model closest to the idea of Agile development, which also assumes elasticity at the center of software life cycle.

Agile development is about accepting the fact that numerous variables make you unable to precisely determine the time and sum of money required to develop an application beforehand.

It’s also acknowledging that your app concept can evolve over time, and some features may replace others.

In short, Agile development assumes that software development is a continuous process with several milestones rather than a one-shot set of activities.

When is it good to go for T&M?

Suppose you are planning to release an MVP from which you will learn what works and what not. Only after drawing conclusions from that stage, you are going to add more features and further refinements. You don’t have all the mockups and user stories. You don’t know which parts of your initial idea will catch fire and which will fail, but will learn it along the way and make subsequent decisions.

If this long-term perspective looks like your plan for an application, then the Time and Materials model is for you.

As with fixed price, project management and QA are free in the T&M model.

Yes, I know you are still asking yourself one question…

How much will you pay in the time and materials model?

Fear not, neither “Flexibility” nor “elasticity” in the time and materials model mean that you will be charged with no limits.

Quite the opposite, in this model, you are in full control of your spendings. Agile development is divided into periods, called sprints, each of which should result in a measurable increment, such as a new functionality.

It is up to you, how many hours you’ll plan for each sprint (usually lasting between two weeks or a month), and you will be billed for this particular number of hours. At the end of each billing cycle, you will receive a detailed report on how many hours were spent on your application.

If, along the way, some feature requires more hours than initially planned, you will be immediately informed. You can track the time spent on your project in our tool, Teamlens, on the daily basis, and make informed decisions based on these reports.

Prices in T&M also includes QA and project management.

As you have probably sensed, the Time & Materials model and Agile approach are based on active participation of both: the product owner and the development team. And this is also the model upon which the majority of projects at Prograils rely. Long-term business relationships value close involvement of all sides.

Time & Materials combined with fixed price

Software companies from all around the world offer different variations of pricing models.

Each of them stems from their own experience with various clients. However, it’s safe to state that Time & Materials is still the prevalent one for long-running commitments.

At Prograils, we mix both classic models if a certain case requires it. We schedule a specific feature (or set of those) to be developed within a fixed scope and price. The client is then billed for this specific part of work separately.

The mixed option can be a way to go for those whose budgets on certain features are limited and want to stick to those budgets strictly.

As with both previous cases, the code ownership is transferred after an invoice has been paid.

Wrapping up

  • Pricing models in software development differ from company to company, but as a rule of thumb all of them stem from two classic ones: Fixed Price and Time & Materials.

  • The Fixed Price model is focused on stiff price and release at sharp deadlines, but requires advance work and almost 100 per cent certainty about target audience, user behavior and reception of concrete functionalities.

  • The Time and Materials model, on the other hand, accepts the multitude of variables in software development process and bets on the ability to react to these factors whenever they appear. This makes it a perfect match for Agile development, in which flexibility, prioritization and active cooperation of both sides of a contract are fundamental values. In T&M, recommended for long-term commitments, the client is billed for the amount of hours spent on developing his application in a given period.

  • Software companies can combine the above two models when needed. At Prograils, we sometimes agree to develop certain features of an app within a closed scope and a fixed budget.

  • Regardless of the charging way, your app’s development at Prograils always includes project management and quality assurance.

Looking for a perfect pricing model for your application? Contact us and let’s talk the options.

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