Fundamental Outsourcing Pricing Models to Consider

February 15, 2021

More and more businesses are starting to embrace software development outsourcing. There exist three main engagement models that enable companies to successfully collaborate with offshore or nearshore developers. These models include a dedicated team, team extension, and project-based model.

Outsourcing Pricing Models Team

Whereas companies are aware of these engagement models not all of them know about the 4 main pricing models that make a financial basis of outsourcing.

Taking into account that the main objective of outsourcing is cost reduction, it’s worth noting that understanding better each billing plan will help businesses make well-informed cost-effective decisions and take full advantage of collaboration with an outsourcing partner.

Here are the fundamental pricing models that we will discuss in the article below:

  • the time and material plan
  • the fixed-price plan
  • the CAP plan
  • the monthly flat rate plan

Now, we will dig deeper into each pricing model to know the difference between them and to choose the most appropriate option for your business.

Time and Material Plan

This is the most popular model and it will be a great solution for establishing a long-term collaboration with an outsourcing vendor.

Time and material plan is very flexible and will be suitable for companies that have not envisioned the clear goal, specifications, product’s features, and strategies to achieve it.

This particular pricing model suggests that the time and cost of the services cannot be defined right away. It will be possible to find out the final price based on the time and effort a dedicated software development team has spent on your particular project.

It’s worth noting that a client has to cover additional expenses like purchasing software and hardware required for task completion.

Outsourcing Pricing Models Budget

The pricing plan is an option large organizations and companies should consider. The collaboration details and contract can be easily changed to satisfy the dynamic fast-changing needs of a client.

The service provider can agree on an hourly/daily/weekly/monthly rate for the employees of different skill levels.

It is pivotal to establish effective communication between parties to ensure the consistency of the development process and verify the deliverables.

Fixed-Price Plan

Unlike the previous pricing model, a fixed-price plan makes the final project costs crystal clear and a business can understand the budget before the beginning of the development process.

This plan requires a client to do some extensive research, prepare all the specifications and agree on project requirements beforehand. Once all the details are defined, the deadlines will be set and a client will get fixed cost estimates based on it.

This plan will be a perfect solution for companies that want to establish short-term collaboration with qualified software developers and get the job done based on existing requirements.

In this case, a customer is not actively involved in the process of managing the development process as it is done by the outsourcing company.

Bear in mind that this particular billing plan is not flexible and any changes in project specifications will lead to cost adjustments. Respectively, choosing this option is suitable for companies that have a clear understanding of the final product’s functionality.

Outsourcing Pricing Models Project

CAP Plan

This plan lies somewhere in-between time & material plan and fixed-price plan.

Though it is flexible enough for a client to make project adjustments on the go and get the price changed accordingly, it also doesn’t allow any extreme cost fluctuations as the cap (an upper limit) might be imposed.

The upper budget limit is defined by the client according to their needs and project requirements and it cannot be surpassed.

This is a great strategy to prevent uncontrolled cost escalations during the development process. It enables a company to keep a close eye on a budget and eliminate any excessive charging.

Monthly Flat Rate Plan

Here is another billing plan that offers clients transparent cost estimates for the software development services. The name speaks for itself and the plan suggests a client pay a fixed monthly fee for the services of different levels of expertise and all features.

The pricing model is very straightforward and will be cost-efficient for short-term collaboration in particular. Companies with a tight budget should certainly pay closer attention to this option.

No matter how complex or challenging your project is, you will still pay the agreed fixed rate for the software engineering workforce.

Final Words

Knowing pricing model types is as important as knowing the main engagement models to establish effective collaboration with an outsourcing team of software developers.

Now, once you have a sufficient understanding of each billing model you can choose which one is the most suitable option for your business needs and budget requirements.

Feel free to get in touch with our experts to discuss your project details and decide on a billing model that will be the perfect solution in your particular case.