How Do I Get My Custom Software On A Fixed Cost Basis?

Because we’re a custom software development company, we often hear this question. Providing a fixed cost estimate on custom software upfront is challenging. Why? We compare this process to building a custom house. If you want to build a three-bedroom, two-bath house the price could vary depending on the location, layout, and features you want. The same is true with building custom software. Your business must first find out what your software goals are and then layout a strategy on how you will get there.

Fixed cost model: where to start

Determine if your vendor offers it: Some vendors won’t allow projects on a fixed cost basis. The reason for this is it can be risky for all involved. In the beginning, software projects have many unknown factors. Many vendors will not offer a fixed cost estimate upfront. A good vendor will want to help you work out a detailed plan first. Avoid potential vendors who offer fixed cost measures with an upfront cost without having any understanding of your requirements.

Understand the scope of your project: Software customization is a multi-step process. You want to start the process by going through an initial discovery and design process. Once you know what the project entails, a vendor may then be willing to offer a fixed price to your business.

Upfront fixed cost estimates: the exception to the rule

Even though it may be rare to get a fixed cost estimate upfront, it is possible. If you have someone on staff skilled in writing software requirements, a vendor may be able to use your plan as is. Make sure if you’re going this route the requirements are as detailed as possible. If the plans don’t provide the level of detail needed you will need to refine the scope along the way. Changes in scope result in having multiple change orders which could end up costing you more time and money. If you don’t have someone to help you with the planning, you’ll want to get a software development company involved in this process.

Is a fixed cost model right for your custom software project?

There are several things you should understand before you go with the fixed cost route.

If it’s not defined, it will be left for interpretation:

A detailed set of requirements is not all you need to iron out. Once the requirements are set, you’ll pass them onto the developers. Here you’ll need to clarify your needs to make sure everyone is on the same page. Misinterpretation of requirements resulting in changes in scope happen. In terms of your budget, be sure to take this into account. On the fixed cost contract, it states a price, but this does not include changes.

Changes to project scope:

Fixed cost tries to use your requirements to nail down the scope at the beginning. Every project has issues that arise that can impact the budget. Projects are moving and continually improving to better meet end-goals along the way. Being able to account for every change upfront is next to impossible. If you’re set on using the fixed cost model a good way to keep it within your budget is to narrow the scope of the project.

The devil is in the details: It’s said the devil is in the details. This is especially true with custom software if you want to keep a fixed cost. The more detailed you can be with your requirements the better. Going back to the custom-house example, if you go to the builder and want a granite countertop. What will happen if you pick a granite countertop that is not the builder’s basic brand? It could result in the cost going up. If you can specify the details upfront, it can help you be more accurate with your budget. To give you a real-world example, say security is an important requirement for your business. In the beginning, you state you need a login. Then later you realize you actually want to be able to login with your Facebook account. As far as requirements go, these are different.

Specify your software criteria:

To help clarify the details, supplement your list of requirements with acceptance criteria. This is a detailed set of criteria that both parties agree on to help define what “done” means. An example of this is: A developer feels they completed a certain requirement, but you don’t agree. You could both go back to the acceptance criteria as a guide. The main requirement could be “user login.” Acceptance criteria will state the “user login” is complete when the following is done. Number 1 the user is able to put in a username, number 2 the user is able to put in a password and number 3 the user is able to reset the password.

Accounting for the timeline:

Taking into account all that we outlined above, fixed cost projects can go on too long if you’re not careful. To keep this from happening set a timeline upfront. Be sure to tie the project’s payments to milestones and deliverables. When the vendor delivers the project in phases, this keeps you from getting months down the line only to find out the project is not working. Set up deliverables every couple of weeks and pay in milestones. When it comes to your budget be sure to add in cushioning for change orders throughout the project. If you’re going to use a fixed cost for your project never use your max budget as the monthly amount.

The grey zone:

Be aware that fixed cost models can lead to a confrontational relationship instead of a supportive relationship. One of the downsides to a fixed cost model is it causes your business and the vendor to be at odds with one another. Why? Whenever grey areas come up it forces each party to defend themselves. As an example, when an issue arises a vendor may say that’s not in the original scope. The business would respond by saying I’m not asking for a change in scope. But rather I’m providing further clarification to the original requirements. This process would go back and forth until there is an agreement made.

If a fixed price model isn’t for you

If fixed cost is not right for your business, no worries. Most vendors provide alternative models that may work better for you. Maybe you want to try it out and switch to another model later if it is not working or your needs change. As long as your vendor is flexible and provides this as an option, it is possible. For example, sometimes a project starts out with a time and materials model. Maybe the client didn’t know all of the requirements upfront and wants to switch to a fixed cost. In this case, they could do a milestone or move the project to a fixed cost. In summary, fixed cost is not for every business, and depending on your vendor it’s likely not the only price model available.

What’s more important than picking a pricing model is ensuring you are working with the right vendor. If you’re new to the process, we’ve got you covered. Learn the 3 essential questions you must ask any vendor before you start working with them. Download the guide below.

Ann Mooney

Ann Mooney is the Director of Business Development at SOLTECH, and has over 30 years in Sales and Account Management in the Technology, Telecommunications, and Medical Industries. Ann’s key specialties are building long-term business relationships, results-driven sales, and account management.

Ann joined SOLTECH in 2016, she works directly with SOLTECH’s clients to help find them the best technology solutions for their business. Ann utilizes her strategic leadership and proactive problem-solving skills to continually grow SOLTECH’s business and ensure excellent customer service.

With her years of experience in the technology industry, Ann likes to share her expertise to educate her audience on the enhancement of workplace productivity and growth through software solutions in her articles. Her insights offer advice on important considerations for creating custom software, including initial steps, development costs, and timelines, as well as the advantages of collaborating with a skilled software development team.