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4 Reasons Why Fixed-Price Software Development is Bad for Your Business

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Doing something on a fixed budget is generally a good idea. You don’t break the bank impulse-buying things and get what you wanted without falling prey to unnecessary temptations. Seems clever.

Not when it comes to software development. Not anymore, anyway. We decided to move away from this pricing model at Infinum when we adopted an agile approach to software development. We believe fixed price no longer works because you’re not buying a fixed product – or at least you shouldn't be.

1. Losing control over the scope

Many clients think: "If I don’t set a budget cap, it will end up costing me gazillions!" In contrast, fixed-price budgeting gives clients a sense of control.

In reality, when the scope of the project is tied to a budget, you’re not able to respond to change.

In today’s circumstances, whole markets can change in the course of a single project. User needs are changing as we speak, and your competitors aren't sitting around either. Adaptability is everything. Depriving yourself of the possibility to adapt is actually depriving yourself of control.

2. Missing the opportunity for early ROI

Every fixed budget is based on a solid estimate. To structure a precise estimate, experts must document all features and implementation specifications. This preparatory phase takes time and money and delays your market entry.

The agile manifesto has embodied the principle “Working software over comprehensive documentation.” In other words, skip your feasibility study in favor of basic but functional software as soon as you can get it. It is the best possible estimate for your final product, and it allows you to fast forward the preparation phase and cash in on your vision sooner.

3. Getting stuck in multi-month milestones

In the world of fixed budgets, every change on top of the initial scope needs to be estimated and then integrated into the next phase of the project. This approach results in multi-month milestones, while incremental development brings frequent deliverables. There are a couple of reasons why frequent delivery is a must.

Firstly, user feedback is king. When you deliver frequently, you can test frequently and adjust features as the product evolves. Secondly, your stakes are high, so you want your risk as low as possible. Frequent delivery gives you a very clear idea of how your product might do on the market. You won't need to wait six months or more and then keep your fingers crossed.

4. Clash of objectives

A fixed-budget agreement usually calls for a request for proposal – the RFP. This document precisely defines the product and its requirements. A team working on such a project will take the RFP's scope as their goal, and aim to fulfill the requirements without moving an inch away from it. Why would they, if that's what the client wanted?

This will, of course, result in the delivery of the required product, but maybe not the best possible product. When the product itself is the whole team's goal, motivation grows and all sorts of magic can happen.

Don't limit your digital product

When you’re commissioning a digital product, often it’s absolutely unique. We’ve never done it before and you’ve never done it before. We’ve certainly built enough products to this point to be able to share an educated guess, but in this dynamic market, we need to be able to think on our feet.

You don't want to be delivering a product that would have been a huge success a year ago, right?

Fixed-price budgeting may give you a sense of control over your expenses, but it also means setting limitations to the project. Ultimately, this will lead to dissatisfaction on both sides.

Instead, explore the different approaches to pricing to learn which one is best suited for what type of project.

Josipa Tadić is the artist behind the cover illustration.