Pros and cons of the fixed price model
DateAug 2, 2019
In this series, we’ll take an in-depth look into some of the most popular partnership and pricing models between clients and agencies or development companies. First on the line – fixed price model.
A couple of weeks ago, I wrote a blog that briefly explained four partnership models we most commonly use at Bornfight – fixed price, time and materials, retained partnership and the consulting and training model. Now I decided to dig a little deeper and explain the details, the pros, the cons and the different types of projects these models are good for.
Every blog post in this series will cover one of the models. And the first one we’ll talk about is the fixed price model. So let’s get started!
What is the fixed-price partnership model?
Fixed price is a partnership model where a client sends a project brief to the development company, and the company sends back an offer with a fixed price according to the received information. This offer includes information on what the client will get for the set price, information about the available rounds of feedback for each phase of the project and the timeline. When the client accepts the offer, the company starts with the production process.
The most important thing to know before going with the fixed price model is the full scope of the project. Before we start working, before we even send an offer to our client, we really need to know at least 90% of all the aspects that need to be created and implemented. If we can’t define those 90% of all aspects of a specific project, then fixed price is most likely not the best model to go with.
Another element of the fixed price model, I mentioned it briefly a couple of paragraphs before, is feedback. In this partnership model, clients get a specific number of iterations that can be done per phase of the project. 1 or 2 rounds of feedback are usually included in the initial offer – if clients need additional rounds of feedback that fall outside of the initial scope and the initial accepted offer, then a new offer is issued for every additional round of feedback. Also, when a phase of the project is finished and approved by the client, that part of the project is considered locked and we move onto the next phase.
What does the initial setup look like
When it comes to initial setup, there are three different situations that could happen.
Extremely detailed brief
This is a situation that happens when clients know exactly what they want and send us a really detailed brief that covers almost every aspect of the project. When this happens, we usually set up a meeting with the clients where we go over those final few things that they haven’t fully defined. When this thing is done and every part of the project is scoped, we prepare and send the offer with a fixed price and a set timeline.
Moderately defined project
The second situation happens when there are more than a few undefined elements, or even undefined core aspects in the brief. This is when we organize a series of meetings with the clients and go over all the undefined parts to get the whole picture – every meeting is used to iterate on the potential solution until we get to the one that solves our clients’ problems. If we have a clear scope of the entire project after these meetings, then we can send a fixed price offer.
The third, and final situation that can happen is that the entire project is so complex that it becomes impossible to scope without conducting a discovery workshop – a series of fully structured, full-day meetings whose primary goal is to define the entire scope of the project. Depending on the output of the discovery workshop, we may send our clients a fixed price offer, or propose some other partnership model – if the project itself ends up being so large and complex that a fixed price model wouldn’t be a viable option.
For which types of projects is the fixed price model a good option
Some of the projects where we most commonly use the fixed price model are web design and web development projects, as well as some smaller mobile applications that have a clearly defined scope and needed functionalities. In some extreme instances, even a web application or a digital product could be conducted under this fixed price model, but their scope really needs to be fully defined.
This is actually one of the main differentiators – if the project can be fully defined before any production starts, fixed price model is a viable option. If, on the other hand, a project cannot be fully scoped, it’s best to resort to time and materials or the retained partnership model.
For which types of projects the fixed price model isn’t a good option
When it comes to types of projects where I don’t recommend using the fixed price model, that would be various types of long-term development projects where the scope of the project is likely to change. For example, a majority of web applications, mobile applications and digital products that are generally more complex fall into this category. The thing is, if we’re building a solution for end-users, a solution that will be placed on the market -that solution needs to be constantly analyzed and upgraded in order to meet the needs of the market and its users.
If that’s the case, we always start by building an MVP, a solution with a minimal number of features that we can use to see how the market responds – we gather feedback, we iterate, we upgrade and that process keeps on repeating. Because of this process, we can’t scope the project right from the start and we don’t exactly know what it will look like in the end because it’s affected by external variables.
In addition to these types of projects, I wouldn’t recommend the fixed price model for those projects in which clients know the scope, but still want to have the freedom to test everything, iterate and go through as many rounds of feedback as they would like.
For example, if we’re using the fixed price model, our team will deliver a proposal of the design, clients will have their one or two rounds of feedback, and when that is approved, we go to the next stage. On the other hand, we had clients that wanted us to prepare a couple of design proposals and work on all of them at the same time – and they would pick one of them when they felt they got the exact thing they needed. They wanted maximum flexibility to change, add new elements, iterate and test – that’s where the fixed price model doesn’t work because every new iteration would need to come with a new offer, a new timeline, a new process. For these types of situations, it’s far better to go with the time and materials or the retained partnership model.
Pros of the fixed price model
Fixed price model comes with a number of clear benefits for our partners and clients.
Cost is defined up front
With the fixed price model, clients are in the ‘what you see is what you get’ situation. We scope the entire project, we create a detailed plan of all the elements and functionalities we’ll need to create or implement and we give our clients an offer with a clearly defined price. When the clients accept the offer, we start working.
This model enables them to have full control over their budget because they know they won’t be charged extra or need to pay some unplanned fees. The price that is on the offer is final and that is what the client will pay for the solution they’re getting – nothing more, nothing less.
As for the payment itself, this is also something we define with the client. The price can be paid in instalments, all at once… the main thing here is that clients know the exact cost and that enables them to fully manage their budget. This is in direct contrast with the time and materials model – this model doesn’t have a fixed price, but the client pays for the amount of hours that were spent working on their projects.
Clear production timeline
The second large benefit for clients is a defined timeline. Although the fixed price model doesn’t guarantee that specific specialists will work on the project from start to finish, it does guarantee an exact date when the project will be finished and ready to be launched. After we’ve scoped the project and defined all of its elements, we’ll also send our clients the proposed timeline for every phase of the project.
That is quite an important benefit because client not only know what they’ll pay for the solution they will be getting, but they also know when they’ll be getting it.
Set expectations and a detailed output
The last thing I would single out is that feeling of safety where you know exactly what you’ll get when the project ends – all the expectations are set right from the start, you know what functionalities will the final solution have, how will it all work and you know how the entire process will be conducted.
The entire uncertainty aspect is nonexistent because we defined every single element right from the start and there are no surprise additions or last-minute revelations that can completely change the project. When we’re using the fixed price model, we’re practically sure that 90 or more percent of the project is fully defined, and those last 10% are what we finalize through incorporated feedback and iteration.
Cons of the fixed price model
On the other hand, this fixed price model comes with one clear con.
Limited or no flexibility
The thing with the fixed price model is that you as a client don’t have a lot of flexibility. The scope that’s defined and approved at the beginning of the project stays the same until the project is launched. For example, let’s say we’re working on a web project that’s going to be launched in 6 months. We scoped everything, agreed on all features and elements and started working. If we’re going with the fixed price model, you can’t decide to change some of the aspects after 2 or 3 or 4 months.
I mean, it is possible to do something like that, but it involves going through the whole process of scoping and defining the aspects of the project, as well as creating and accepting a new offer. That is like basically starting a completely new project as it changes the aspects of the project, the final price and the timeline.
This is why I always say – fixed price model is great for those projects that can be fully scoped right from the start. If that is not possible, it’s much better to go with another model.
Other blog posts in the series
This has been all for this edition of partnership & pricing models. Follow the links below to read other posts that have been already published in this series.