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When you’re seeking a quote to build your app, app development agencies will often offer a fixed price contract. These agreements can be attractive because they provide a clear price and concrete deliverables for the project.
There are benefits to a fixed price agreement, but also a few trade-offs. Before you sign a contract, it’s good to weigh your options. Here are a few things to consider when deciding if a fixed price agreement is right for your new project.
What is a fixed price agreement?
A fixed price agreement guarantees delivery of certain features for an exact price. Sometimes, a fixed price agreement also includes a timeline so you know when to expect your project to be completed.
The most attractive component of a fixed price agreement is in the name: the price. You know exactly how much you’ll be paying for your project. This is a massive benefit for clients who have a limited budget.
Fixed price agreements include a detailed scope of work. The scope outlines all features that will be built for your app. The details are important: the scope of work is your agreement on which features will be built for the desired price.
Alternatives to fixed price contracts
Time and materials contracts—often called T&M contracts—are very different from fixed price contracts. T&M contracts are a simpler agreement: you are agreeing to pay the agency for the time they work and the materials (software licenses, hosting costs, etc.) they use to build your product.
If you don’t know exactly what you want to build, a T&M agreement is a much better option than a fixed price agreement. While T&M work has no guaranteed deliverable, it gives you flexibility. Instead of a defined scope of work, the agency works under your direction. If you wake up one morning with a new idea, you can have the team pursue that idea without renegotiating contract terms.
Time and materials with a cap
Some agencies offer a hybrid of fixed price and T&M contracts. They may offer to “cap” the amount of time they will work on your project. The scope remains variable, but the agency will commit to a maximum amount of time they will work on your project. This is a good option if you have a limited budget but want to make changes to the product along the way.
Typically when an agency offers a T&M agreement with a cap, they will ask you to define an overarching goal for the engagement. For example, you may say that you wish to prove that certain features are technically viable. The agency will work toward your goal, focusing on the most important work to reach your goal within your desired budget. However, unlike a fixed price agreement, this type of agreement comes with no guarantee of a finished product.
Time and materials with a minimum
Depending on the agency, you may be asked to commit to a minimum amount of work when signing a T&M contract. There is minimal benefit for you as a client to agree to a minimum. Minimums are useful for helping the agency decide how to staff your project. You may not be able to commit to a minimum amount of work if you are unsure of what exactly you wish to build.
Minimums make the most sense for long-term support agreements, not new projects. In a support agreement, understanding how much time to commit to your product is an important part of ensuring the agency’s team is available to take on high-priority work for your production app.
When is a fixed price contract a good idea?
Fixed price contracts are best when you have a clear plan for your project. You know exactly what you want to build and are committed to a specific vision of how your app should look and function.
It also makes sense to use a fixed price contract when you have a limited budget. If you know you can not exceed a certain amount of money—say, $40,000 for your public launch—a fixed price contract will give you a working product within that budget. So long as you are comfortable with the scope of work your agency can provide within that budget, fixed price app development may be right for you.
The more certain you are of exactly what you wish to build, the better. A fixed price contract is the best fit when you have a full app design and a detailed description of every feature you wish to build. However, you must be certain that you are committed to the feature requirements you specify in the contract.
When is a fixed price contract a bad idea?
If you expect things to change during the course of your project, you may find a fixed price agreement frustrating. For an agency to honor their end of the fixed price bargain, they expect to build exactly what you agreed to in the contract. That means you can not change your mind about what you want to build. Even if you see an early build of your app and decide a different set of features would make for a better user experience, the agency may insist on sticking to your original plan.
That rigidity is a major drawback for fixed price contracts. Agencies can only provide a firm fixed price quote if they know exactly what they are building. If what they are building changes, they can no longer guarantee the same price.
Some agencies will still try to offer flexibility in a fixed price contract. They may define a change request process, allowing you to make changes to the scope of work. However, change requests are not free. You will either be charged more money for the changes, or you will have to remove other features from the scope of work to stay within your agreed budget.
Often, change requests within a fixed price agreement give a false sense of security. Change requests basically say “don’t worry about the drawbacks of this agreement.” In the real world, though, change requests almost always have an impact on the overall project. Even if you and your agency agree on changes, the changes may impact other assumptions or designed interactions in your app. The agency may have to cut corners or implement non-ideal solutions to technically meet the terms of your agreement.
Hidden costs beyond the initial scope
Clients who choose a fixed price agreement may be surprised when they receive their final deliverable. While the contract may say otherwise, you may expect that a fixed price contract guarantees a “complete” solution. Unfortunately, this is not the case. However, no honest fixed price agreement will guarantee much beyond the exact scope of work.
An application is not truly “complete” just because the agency meets your fixed price milestones. You will learn more about how users use your app after your fixed price engagement has ended. You may find that you need to make changes to the app to keep users satisfied with your product. That means you will need a new agreement with your agency to continue improving your app. This realization can be a rude awakening if you expected your entire product development budget to be covered by your fixed price agreement.
How to decide on a fixed price contract
Ultimately, if you want flexibility in how you build your app, a fixed price contract is not ideal. Time and materials contracts make more sense if you value flexibility and collaboration over certainty.
Conversely, if you have a clear vision for your app and are committed to that vision, a fixed price contract may be the way to go. A limited budget can also be a huge factor in deciding to go with a fixed price agreement. If you must remain within your budget, a fixed price contract will ensure you have a working app at the end of your engagement. Fixed price contracts are a good way to guarantee you reach certain feature development milestones within your budget, which makes them an enticing option for building a minimum viable product (MVP).
If you do decide to sign a fixed price agreement, we recommend keeping the scope small. Consider your first fixed price agreement a test run for a long-term partnership with an agency. Instead of agreeing to a $100,000 scope of work, aim for a $20,000 (or less!) scope that delivers something valuable quickly. Minimizing the scope minimizes the risk of feeling locked in to a contract that is not working well for you.
In short, fixed price contracts work best when you are 100% certain of what you wish to build and what it’s worth to you.