Debunking web application development pricing models

By: Sean K Blair, CTO at MXOtech

Comparing bids for your web application development project isn’t as clear-cut as you would hope. Some IT firms present a fixed cost while others provide you with a much lower project “estimate.” So how do you pair the right price with the right expertise?

I’ve put together this list of the methods IT firms use to estimate development project costs and tips for evaluating each.

The risk of having to overpay is high — more than half of application development projects end up costing 189 percent of their original estimates. A project can go over budget or the estimated timeframe for many reasons. It’s important that you don’t get stuck with the bill!

So why do some development companies charge exorbitant rates while others seem too good to be true? How can you avoid overspending and come away with an application that meets your business needs?

Compare project bids with confidence

Your project has thousands of small technical requirements. Your partner must have the talent and processes in place to accurately predict budgets and timelines, manage the details and deliver the application functionality you want.

Read: How to ensure your web application development company stays on budget.

Development companies have different business models, project management processes and skill sets, which leads to confusing pricing models that you can’t always compare side by side.

Instead of immediately going with the lowest project estimate, take time to understand the pros and cons of each pricing model and ask the right questions to avoid budget scope creep.

How to evaluate web app development pricing models

Most application development companies fall under two pricing models: time and materials or fixed-bid projects.

Here are popular web application development pricing models and estimation methods — and how to compare each:

Time and materials pricing

Your time and materials (T&M) proposal likely includes budget “estimates” and “rough” timelines. Development firms using this model often undercut other vendors with low estimates to win the sale. But the price you see is rarely the price you pay.

Using a T&M pricing structure could signal a few underlying issues:

• Poor project management processes: Fine-tuned project management processes keep your application development project moving and help firms break down the workload into actionable tasks. Some development companies use the T&M structure when they don’t have the project management processes dialed down to accurately predict budgets and timelines.
• Lack of talent or expertise: Other times, a T&M structure can signal a lack of experience. If a team hasn’t completed similar projects, they won’t have the confidence to provide an accurate, fixed bid.
• Requirements aren’t defined well enough: Sometimes firms use T&M pricing as a defense mechanism. The requirements either aren’t defined well enough or not fully understood. If a firm presents T&M pricing, ask questions to determine if the requirements are the reason.
• Your project could quickly go over budget and timeline: T&M pricing guarantees the development company gets paid for the time they spend on your project — but doesn’t incentivize efficiency. Teams can’t confidently forecast project timelines and budgets, so they charge by the hour to cover potential overages. This model lacks any incentive to stick to a schedule or budget.

If a firm uses T&M pricing, drill into why. Ask to speak with past customers (at least three) to learn whether their project stayed on course.

Since MXOtech was born in 2005, we’ve completed over 235 application development projects! Read MXOtech client testimonials here.

Billable hours — freelance IT consultants

If you have a relatively simple job or tight budget, you might explore independent IT consultants.

Sites like Upwork and AwesomeWeb have droves of freelance developers who charge next to nothing. Most freelance IT consultants charge far lower billable hour rates than established development firms. These low hourly rates might be attractive, but you sacrifice quality.

With freelancing sites, you’re relying on one person to develop every piece of your complex application, maintain quality assurance and manage the project and all communication. No one person can execute each phase with precision. Mistakes or knowledge gaps are inevitable.

Running a one-man show means consultants also struggle to forecast budgets and project timelines. They don’t have time to invest in project management and accurately track their efforts. Your requirements or feedback could easily get lost in the mix.

Independent contractors juggle multiple projects and jobs at once, so time constraints are possible. Communication can also be dicey, and accountability rarely exists. And like the T&M pricing model, charging by billable hour means there’s no motivation to complete the project quickly and efficiently.

Read: 6 reasons to rethink hiring an independent application consultant

Fixed-bid projects

Unlike T&M pricing, companies that use fixed-bid pricing give you a hard cost and timeline.

However, many development firms bake in costs to protect themselves if your project doesn’t go as planned. Virtually every company that provides fixed-bid pricing builds in hours for contingency. Ask your development partner how they determine the amount of contingency that's factored into the price.

Watch out for stipulations that if the project exceeds budget or timeline, it switches to T&M pricing. Many development companies bind fixed-bid prices by the statement of work, which defines the work the firm will complete under the agreement.

If you request work outside the statement of work (SOW) or new requirements come up, expect a change order that modifies the scope and price. Change orders are standard practice, but binding a SOW by only time or budget isn't. This practice turns a fixed bid into a T&M estimate.

If a firm adds clauses to the SOW centered around hours and budgets, there’s a good chance your project will go over budget or timeline. If the firm lacks a solid project management process or doesn’t have past data to break down projects and forecast budgets, your project is headed down a long and stressful path.

Creating confident fixed-bid pricing

MXOtech has a specific process to create accurate and fair fixed-bid prices for complex projects.

For the bid to be accurate, several things have to be in place:

• The development team must know and document all project requirements and technical constraints.
• The business objective/ROI for these requirements must also be known and documented.
• The development team must be able to create a product backlog, which breaks down the project into small, valuable pieces of business functionality (called stories in the scrum world).
• From the product backlog, the team must be able to assign relative sizes to each story.
• Project managers must have enough history with these teams to accurately translate these stories into a project plan. This plan consists of sprints (1-4-week long development iterations) that contain the right sequence and number of stories the team can commit to finishing in the sprint.

Once these steps are complete, the team derives pricing from the project plan.

As you can see, it takes time to develop this kind of pricing. MXOtech handles this during a business process improvement assessment. This short-term (about 1-2 week) engagement centers around addressing specific business problems and exposing all potential solutions.

At MXOtech, we’ve perfected the agile project management method to deliver accurate project timelines and fixed costs. The price you see is exactly what you pay.

Need help with your next web application development project? Contact MXOtech today to learn how we can bring your vision to life: 312-554-5699.

Other articles you might find helpful:

• The Ugly Truth About IT Consultants and Vendors
• How to Ensure Your Web Application Development Company Stays on Budget
• How to avoid selecting the wrong IT company: 5 Red Flags that could cost your business thousands of dollars
• Top Enterprise System Integration Methods and Tools
• 6 reasons to rethink hiring an independent application consultant