All You Need to Know About Fixed-Cost Model
Updated on Jun 6th, 2022
As a business owner, entrepreneur, or freelancer, one of the most crucial decisions you have to make is to set your prices at a fixed rate or bill by the hour. While the price is often a deciding factor to choose the vendor, most customers have budgetary concerns. And when you need to decide the pricing of your work, it’s at times challenging to escape the camp mentality of “hourly rates vs. fixed rates.” Additionally, your pricing model should be situation-specific, so you select the best approach for your own creative and financial operations.
Let’s discuss the definition first,
What is a Fixed-Cost Model?
A fixed-cost pricing model is the one that guarantees a fixed budget for any specific project, regardless of the time and the expense.
This kind of pricing approach is best suitable for the projects which strictly define requirements and scope that won’t change.
And any changes would require additional estimation and contract. So, the main requirement of using the fixed-cost approach is to define the scope as well as technical requirements upfront precisely.
Let’s discuss some more… about it!
A fixed-cost approach can be either the best or worst choice for the freelancer. The fixed-cost project is usually budgeted before you begin with the job, and if you accept, you are committed to the price. In case you set a high-end price at the outset, and the project is completed on time and under budget, the fixed rate may work out well for you.
In the industry, however, the scope of the job can be hazy or unclear in the beginning. It is possible that the client may not like the work or would ask you to make some additional changes and revisions that can add hours — or days — to your schedule.
But remember, If a fixed-cost agreement escalates, or more elements, problems, queries, and issues complicate the deal, you could be stuck losing time and money.
Advantages of Fixed-Cost Model:
1: Managing Contract Cost
The fixed-cost model helps the small business to manage the cost of hiring outside the company, the reason being the business and the contractor determines the total value of the agreement before signing. However, the value of the contract in the monetary terms usually is not subject to any escalator. And if there is an escalator in the agreement, then it typically involves a ceiling that caps the contract’s dollar value. Through this, the small businesses will have a crystal clear picture of how much is it going to cost to hire an independent contractor that, too, without any surprises popping up later in the practical terms and relationship.
2: Eliminating Potential Disagreements
When both sides understand the project entirely, there is comparatively less stress on the working relationship. Generally, a fixed-cost project has a crystal clear value that leaves little room for argument over the life of the agreement. Less complicated contract escalators or clauses minimizes the risk of misinterpretation and misunderstanding that can go against you in civil court if the contractor decides to sue to enforce the contract as he interprets the agreement. This may leave your small business owing much more than the value of the contract.
3: Eliminating Business Costs
The cost of fulfilling the fixed-cost contract in general lies with the independent contractor. And as you being a hiring party, there is no obligation for you to bear any additional compensation for the contractor’s costs, which also include the equipment purchases, fuel costs, etc. as the contractor is working under the terms and conditions of a fixed-cost contract. This helps the contract to remain in the budget and also eliminates the potential for a contractor to submit the inflated expenses.
4: Controlling Effort Level
The fixed-cost agreement controls the effort and professionalism which a contractor must exercise while working under the contract. This enables the businesses to control the dedication of the contractor towards the project and the quality of work a contractor produces. And in case you feel the contractor did not put forth sufficient efforts, you have all the rights under the terms of the agreement to terminate the contract and withhold the payment. But, before doing the same, you should carry the detailed records to prove the carelessness of the contractor before terminating the contract as the contractor may sue you in civil court to attempt to recover money owed under the agreement.
Disadvantages of the Fixed-Cost Model:
1: Certainty Comes at a Higher Cost
The fixed-cost contract provides a buyer more predictability and transparency about the future costs of the goods or services negotiated in the agreement, but this predictability might come with a price. Although it can happen The seller can realize the risk that he is taking by fixing a price, and so he may charge more for a fluid price or a price that he could negotiate with the seller regularly to account for the higher risk the seller is taking.
2: Market Changes
When the value of goods and services is changed by the market forces, which also includes materials or supplying those materials used in the production of goods, in this case, the fixed-cost contract could be a benefit or a loss. If the market forces increase the value of the goods or services dramatically, the buyer is beneficial in monetary terms while the seller has to bear the losses, that he could have enjoyed the profits outside of the contract. When the price of the goods or services drops, then, in this case, the buyer will sit at a disadvantage and the seller at an advantage.
3: All needed requirements are not always fully Predicted
Real experience is still worth than anything and is always useful than a theory. Delicate and creative ideas for improvement may evolve during the practical part of the web development process. So, In these kinds of cases, it is, at times, challenging to add any amendments to a fixed-cost agreement. Re-estimation and change in the requests are required. And unlike other pricing projects (flexible), the fixed-cost model is not designed for changes.
4: Fixed-Cost model doesn’t fit all the web projects
In case your project is small and sophisticated. The fixed-cost model is the best fit for you, and however, it can’t satisfy the needs of the projects based on the large scales that need building complicated functionality and the long terms of implementation, for instance, creating a social network for an e-commerce website.
When should you opt for Fixed-Cost Model?
- Moreover, for sure, every pricing model has its own pros and cons, and in case you want to maximize the benefits and profits while opting for a fixed-cost model, it is really crucial that it fits your project complexity and size.
- This kind of pricing approach is, in general, chosen by the public and Non-Profit organizations for small and medium-size projects.
- Strictly defined rules, requirements, and clear acceptance criteria in the fixed-cost model help you keep count on the fixed budget and deadline and plan your company’s activity accordingly that also involves a minimum risk of surprises.
- The fixed-cost approach is meant mainly for the client with the well-defined requirements and established project management methodologies.
- But, right after the agreement is concluded that any changes or updates in the project, features, or scope will result in a change in both price and schedule.
Matellio works using the fixed-cost model for projects to guarantee that the end product will be delivered on time, within budget, and will correspond to the requirements defined in the agreement. In case you think a fixed-cost model is appropriate for your web project, contact our specialists who gladly implement your ideas, and work with dedication to make them a reality.
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