How to Choose the Outsourcing Pricing Model for Your Project: Dedicated Team, Time & Materials, Fixed Price

Partnering with an outsourcing company to deliver your software may seem risky, too expensive, or uncontrollable. In fact, you can shape the outsourcing process by choosing the most fitting pricing model.

At Apriorit, we work according to three models (and combinations thereof): dedicated team, time and materials, and fixed price. These models allow our clients to cover key project needs and enhance their teams with our experts while staying within the project budget.

In this article, we overview these three pricing models, considering their pros, cons, and common use cases.

This article will be useful to project leaders searching for the most suitable way to deliver their products with the help of an outsourcing company.

Why does the choice of outsourcing pricing model matter?

The outsourcing pricing model defines the type of cooperation, level of involvement on the contractor’s and client’s side, and payment options. Choosing the most fitting outsourcing model helps you get the software you need within your budget and deadlines.

At Apriorit, we use three key outsourcing models:

• Dedicated team, where an outsourced specialist or team works on your project full-time
• Time and materials, where you can delegate tasks to your outsourcing team and pay only for the time and materials they spend on them
• Fixed price, where the scope, deadlines, deliverables, and costs of the whole project are determined before development starts

With more than 675 successful projects under our belt, we can advise which model would benefit our clients the most. When the outsourcing pricing model matches the nature of your project, it increases your chances of staying within budget and having your project delivered on time.

The choice between pricing models is defined by four criteria:

1. Project size and lifecycle phases. These project parameters determine how much help you need from an outsourcing team. If you’re building complex software from the start of the software development lifecycle, or SDLC, you can enhance the development process with outside experts. You can also outsource a major part of your project, such as developing functionality or upgrading a legacy solution.
2. Details of project requirements and scope. There’s hardly a midsize or large project with no changes to its scope from start to finish. Yet some pricing models, like fixed price, depend on getting complete documentation and requirements before the start of development. If you anticipate changes in your project scope and requirements, it’s best to look for a pricing model that allows you to change plans without additional costs.
3. Project budget. It’s important to consider both how much you’re willing to spend on your project and which payment methods you prefer. There are outsourcing pricing models that allow you to pay for the whole project at once, pay for the time and materials your contractor spends on the project, or make fixed monthly payments.
4. The level of mutual trust between you and the contractor. It’s risky to entrust a large, long-lasting project to an unknown development team. So with a new contractor, you might want to choose a pricing model that entails fewer financial risks. For example, you can test your contractor’s skills and dedication with a small project under the fixed price or time and materials model. If you’re satisfied with the result, you can change the pricing model and start building long-lasting cooperation.

When starting a new project, we help our clients choose the most suitable outsourcing pricing model for their case. While there are multiple parameters to analyze and take into account, here’s a brief comparison of fixed price, time and materials, and dedicated team models:

Now, let’s take a closer look at each of these pricing models. We’ll examine how a particular model works and which advantages and disadvantages it has.

Dedicated team

The dedicated team model is a type of cooperation where an outsourcing company forms a team that works exclusively on the client’s project. The size and structure of the dedicated team depends on project specifics like the scope of work, the required technology stack, and deadlines. While some projects require a team with several developers, QA specialists, business analysts, and a project manager, others will benefit more from a small team with a couple of experts.

The dedicated team pricing model is based on fixed monthly payments for each team member. It’s especially useful when you:

• Require constant access to specific specialists. Hiring a dedicated team helps you not only find specific talents but also ensure they’re fully immersed in your project. A dedicated team works with your project full-time, which means they deeply understand the product. And they can do tasks of any level of complexity, from implementation to support.
• Work on a long-term project. Projects that last more than a year need a solid foundation in the form of established procedures for sharing knowledge, writing documentation, and coding. These procedures help you keep project activities organized, structured, and easy to understand for a new team member. A dedicated team with established project management can enforce such standards. This way, your project won’t be thrown back if you need to change the team lineup, add new developers, or pause and resume certain tasks.
• Need to fully integrate the outsourcing team into your project. When working on your project, a dedicated team becomes part of your development team. This team can support any of your internal processes. At the same time, dedicated specialists can be completely self-sufficient in terms of team management and day-to-day activities.

Here’s how the dedicated team model usually works:

At Apriorit, we often work under the dedicated team model since we provide our clients with rare development expertise in several domains. For example, we’ve been working for a couple of years with a manufacturer of virtual reality equipment who needed a team to develop device drivers. With a dedicated Apriorit team, our client gained rare driver development expertise and focused on what they do best — building cutting-edge hardware.

We also have experience working on a legacy project as a dedicated team. For one of our clients, we supported and improved their legacy system for data management while the client was working on a new version of the system. Our client had the expertise to support the system themselves, but doing so meant slowing down development of the new product version. That’s why they decided to entrust the legacy application to a dedicated team and focus their efforts on the new project.

Though getting a dedicated team is a common way of outsourcing software development, it isn’t an ideal model for every project. Let’s take a look at the key advantages and disadvantages of the dedicated team model:

When used for the right project, a dedicated team can provide you with the following benefits:

• Flexible development process. Since you have complete control over the activities of the dedicated team, you can easily adjust them to the issues you face with the project: you can manage tasks in the sprint, the monthly scope of work, the project workflow, etc. This allows you to be flexible and agile.
• Clear and predictable budget. This outsourcing pricing model is based on fixed monthly payments for each member of your dedicated team. This way, you can predict the cost of working with the team regardless of changes in your project.
• Straightforward communication. Members of a dedicated outsourcing team become an integral part of your in-house team for the duration of the project. This makes communication as simple as possible. Unlike with other outsourcing pricing models, you don’t need to renegotiate and sign additional agreements to make changes to the project itself. You’ll only need to complete some paperwork in case the lineup of the project team changes.

Working with a dedicated team may have a couple of disadvantages:

• Complex management of the project team. The more specialists there are in your team, the more guidance they need. Your project managers (PMs) will need to plan the workload of dedicated team members, oversee their progress, and help you troubleshoot any issues. To overcome this, we suggest outsourcing project management in addition to software development. An outsourced PM that works with a team for a long time can manage them efficiently while decreasing the load on your PMs.
• Not suitable for short-term projects. Projects that only take up to six months usually don’t need a dedicated team because there aren’t enough tasks for a crew of full-time specialists. For such projects, it’s best to choose a time and materials or fixed price model.
• Requires a constantly developing project. A dedicated team works on your project full-time. Each team member needs a role, an area of responsibility, and an understanding of the project goals. With a developing and fast-evolving project like this, dedicated team members can also propose new tasks, so you don’t need to worry about supplying your outsourcing team with tasks. If you anticipate pauses and unsteady project development, it’s best to look at a more flexible outsourcing model like time and materials.

Time and materials

Time and materials is a type of contract under which the client pays for the contractor’s services based on the time the contractor spends working for the client. The contract also covers the costs of materials used.

Let’s see when your project can benefit from this outsourcing pricing model:

• Predefined budget. The flexibility of this pricing model allows you to balance the outsourcing services you want to get and your budget. For example, you can delegate a challenging part of your project to outside experts with rare skills but not hire them full-time. With the rest of the project being developed in-house, you can optimize overall project spending.
• Inconsistent workload. The key feature of this outsourcing model is the ability to regulate the amount of work an outsourced specialist does for you. As opposed to a dedicated team, you don’t pay the specialist’s full salary — you only pay for the time the specialist spends on your project. So outsourced experts can be on the bench and start working when you have tasks.
• Medium- and long-term projects. A contract based on a time and materials model allows you to start working on your project quickly and keep development flexible compared to the dedicated team and fixed price models. It better suits fast-growing projects that last up to one year. Longer projects usually have a planned workflow that doesn’t require a lot of flexibility, and the number of tasks is enough for a full-time dedicated team.

At Apriorit, we have the following procedure for working under the time and materials outsourcing model:

At Apriorit, we offer the time and materials model to clients who haven’t yet figured out all the details of their solution. For example, one of our clients, a provider of parental control solutions for desktop browsers, wanted us to develop a similar parental control application for Android devices.

They knew which features they needed in an Android app to provide a high-quality service, but they had no experience with mobile device management implementations. Using the time and materials pricing model allowed our client to figure out a fitting way to transfer their services to the new platform, finalize their requirements, and get the solution they needed.

The flexibility of this pricing model makes it one of the most common, as it fits a wide range of projects and tasks. Here are the key advantages you can get when working under the time and materials model:

• Quick project start. This model is the most suitable for cases when you don’t have much time for the discovery phase of a software development project, such as when a business urgently needs certain software, a certain resource, or certain functionality. A time and materials contract allows you to divide the project into stages and conduct project discovery and requirement elicitation as you go.
• Pay only for actual work. There’s no idle time for an outsourcing team when they work on your project. You can be sure that every hour of work you pay for your contractor actually spends doing your tasks. And you can clearly see the results of their work before you pay for outsourcing services.
• Flexible project budget. Monitoring compliance with the project’s budget is the client’s responsibility. You can adjust the amount of work an outsourcing team does for you to stay within budget. And you don’t need to renegotiate the contract and sign additional agreements for that.
• Possibility to change the project scope. The flexibility of this pricing model allows you to control both the speed of work and plans for the next deliveries. Since each task is estimated and carried out separately, you can add new tasks to the scope without renegotiating with your contractor. You’ll only need to agree on the estimate and priority of the new tasks.

However, the freedom this pricing model provides may lead to severe risks:

• Going far beyond the initial project scope. The ability to change tasks and their priorities on the fly is convenient for keeping development agile. But you’ll still need to sacrifice some tasks or your project risks growing out of proportion and becoming too vague. And with the time and materials model, your contractor can’t take all the emerging risks themselves.
• Going over the budget. Controlling budget compliance is solely your responsibility in the time and materials model. For a contractor, the more work you delegate to them, the more they earn. So a contractor is interested in getting as much work as possible. It may be tempting to provide them with additional tasks, but first, you must ensure that your project stays within budget.
• Risk of unavailable specialists. As opposed to the dedicated team model, you don’t have exclusive access to your outsourcing experts under the time and materials model. Specialists work with several clients simultaneously, and they may not have enough time to do all your tasks. Our project managers avoid this risk by writing the minimum number of specialists’ working hours into the contract.

Fixed price

Fixed price is a type of contract where a client and contractor fix the project’s scope, duration, and total price. After the project starts, any changes require signing additional agreements or making corresponding contract changes. A fixed price model is ideal for projects with a clear scope, established project management procedures, and defined requirements.

There are several use cases suitable for the fixed price model:

• Short-term and small projects. Projects that can be finished quickly are the easiest to deliver under a fixed price contract. You can accurately estimate the project activities, finalize requirements, set deadlines, and be fairly sure they’re realistic and attainable. This outsourcing pricing model rarely works for medium- and long-term projects because it’s challenging to draw up a development plan for them and stick to it 100%.
• Assessing a new outsourcing company. Starting a large project with an unknown contractor is risky. Before doing so, you can do a pilot project with a new company, such as developing an MVP, PoC, or particular functionality of your future product. This way, you’ll get a working solution and assess how well your new contractor performs.
• Staying within a strictly limited budget. While other pricing models have some flexibility regarding the project budget, the fixed price model is an ideal solution for those who can’t afford to exceed the initial budget.

Here’s how we prepare for working on projects under the fixed price model:

This outsourcing pricing model better suits small projects with clearly defined requirements and deliverables. For example, one of our clients tasked us with developing a USB WiFi driver for their device. They already had a driver for Linux and needed an experienced Windows driver development team to port it to the Windows operating system. The client knew exactly what they wanted and provided us with full descriptions of the needed functionalities and capabilities. We delivered the Windows driver in four months as fixed in the contract.

Another client that provides communication services to corporations and federal institutions requested an MDM solution for their tablets. The line of the client’s work dictates strict requirements for data security, device management, user activity monitoring, and other functionalities. Since the client had a lot of requirements figured out, we tried to work under a fixed price model on this project. However, the client wanted to change some product features on the fly, which isn’t possible with this pricing model. That’s why we suggested switching to the dedicated team model.

When applied in the correct use cases, this model can provide you the following advantages:

• Fixed budget, deadlines, and scope of work. Once the contract is signed, you can be sure you’ll get the software described by the discussed deadlines and within your budget. If there are any changes, you and your contractor will have to reflect them in additional agreements. This pricing model makes work on the project predictable and helps you avoid the risks of project blur and budget overrun.
• Quick and predictable development process. With clear deliverables and deadlines, your contractor will work at peak performance to finish the project on time. They have no reason to drag out the development process, since they have to cover all the time and materials spent on it.
• Project risks are covered by the contractor. It’s up to the outsourcing company to deliver your project within discussed deadlines no matter what. You don’t need to worry about incorrect estimates, the need for more developers, or other common development issues.

This pricing model comes with several crucial disadvantages:

• High developer rates. A fixed price contract includes the highest developer rates compared to other outsourcing pricing models. Since in this model the contractor covers any possible project risks, they want to protect themselves from additional spending out of pocket. For you as a client, that usually means that an hour of a developer’s work under a fixed price model would cost more than the same hour under the other two outsourcing pricing models discussed above.
• No project flexibility. After you sign the contract, you can’t change the project requirements without renegotiating the contract or signing additional agreements. The level of flexibility is the key difference between fixed price and time and materials or the dedicated team model.
• Project preparation takes a long time. Before actual development starts, you’ll need to spend a lot of time in meetings with your contractor. At this stage, the contractor wants to collect all project requirements, understand what kind of software you need, and assess the risks.
• Risk of assumed requirements. The success of a fixed-price project fully depends on the clarity and accuracy of the requirements in the contract. If one of them isn’t defined well enough, the outsourcing team may assume the meaning of this requirement and implement their assumptions instead of your project vision. This mistake may also affect the implementation of other requirements.

Are there any other options?

The outsourcing pricing models we’ve described are well-defined and established in the outsourcing market for IT staff augmentation. However, not all project needs can be satisfied with a single pricing model.

At Apriorit, we solve this challenge by combining several pricing models within one project. We can divide a project into several parts and treat each as an independent project with its own pricing model. This helps our clients find the most convenient model for their project while:

• Staying within budget and deadlines
• Having flexibility for managing the project
• Optimizing risks

For example, a client hired us to deliver an AI-based healthcare solution that detects and measures ovarian follicles. Implementing this solution required a lot of research on how doctors work with ovarian follicles, which AI algorithms we could use, what training datasets were available, etc. Research tasks are generally tricky to estimate since there are too many variables and risks. That’s why some outsourcing companies tend to overestimate research-related activities. Instead, we offered our client the time and materials pricing model for the research stage of their project.

For the implementation part of the project, we used a fixed price model. The combination of fixed price and dedicated team models helped the client get their solution as quickly as possible while staying within a fixed budget.

Conclusion

An appropriate pricing model helps you get your software where you want it to be in terms of budget, deadlines, and complexity. Making the wrong choice may lead to exceeding the budget, putting too much time and effort into the project, and getting software that doesn’t meet your needs.

At Apriorit, we work under three outsourcing pricing models:

• Dedicated team
• Time and materials
• Fixed price

With over 20 years of industry experience, we have lots of experience in applying the dedicated team, fixed price, and time and material models in software development. We can help you choose the pricing model or a combination of pricing models that would best fit your project. This way, you’ll get satisfactory results without overpaying.