Currently, 60% of technology companies are outsourcing at least some of their application development. The IT outsourcing industry is projected to grow by up to 5% over the next few years, reaching a market value of 5.19 billion by 2026.

Businesses utilizing outsourcing software development services can potentially slash their expenses by an average of 40%, but this largely depends on selecting the appropriate pricing model. Let’s take a closer look at two popular models to grasp their pros and cons. It helps you to address most challenges and figure out which approach is the best fit for your business requirements.

What does the Time & Material pricing model entail?

This contract doesn’t reveal the total project cost until completion. Instead, the software development company you hire offers fixed hourly or monthly rates for each specialist. You have the flexibility to adjust project requirements and scope as needed. The final cost is determined based on the number of specialists assigned to your project and the hours they dedicate to delivering your product.

Benefits of a Time & Material pricing model:

• Quick project initiation without the need for detailed specifications. You can assign the initial task to the development team and prepare subsequent tasks as the project progresses, reducing downtimes.
• Rates are agreed upon at the start of cooperation and remain unchanged. Additionally, you are not responsible for paying sick leave or holidays, as the contractor manages these aspects.

Drawbacks of a Time & Material pricing model:

• The final cost might exceed your estimates and budget.

To prevent this, you can request that the contractor assigns a skilled Project Manager and Business Analyst to work with your representative in creating detailed project requirements. The more comprehensive the project description, the lower the risk of incorrect tasks.

• The Time & Material (T&M) model adopts a result-centered approach. You can place full trust in the manager from the contractor’s side and may not delve deeply into the workings of the development team. Consequently, there are often instances where highly skilled specialists are replaced by less experienced ones due to turnover, and you might remain unaware of it.

To prevent this, personally interview and approve each key professional. Subsequently, discuss with your contractor the expectation that they will take responsibility for retaining the core talents throughout the project.

T&M pricing model in software development is more suitable for:

• Startups proficient in IT.
• Medium or large businesses where experienced decision-makers manage remote staff and understand how to collaborate with dedicated teams.

How does Cost plus pricing work?

Consider a scenario where you have a long-term project spanning over a year. You may or may not have an in-house software development team, but you require additional resources and a swift acquisition process. In this situation, you reach out to an outsourcing software development company to hire dedicated tech specialists. These specialists become either part-time or full-time employees with fixed salaries and are under your effective control, while legally remaining employees of your vendor. This cooperation model aligns perfectly with Cost plus pricing.

When you opt for the Cost+ pricing model, you offer a monthly payment that covers: a fixed salary for each specialist based on market rates in the vendor’s country, as well as overhead costs to the contractor, such as insurance, rent, utilities, and other expenses.

This approach is suitable for Agile, Kanban, Waterfall, or other methodologies depending on the specifics of your project.

Benefits of a Cost plus model:

• By selecting a vendor, such as in Eastern Europe, you can reduce fees without compromising on development quality. Compared to markets like the US, UK, and Israel, savings could reach up to 40%.
• Your development team begins operating cohesively from the outset, resulting in high performance. These specialists typically have experience working in dedicated teams and possess extensive knowledge of potential challenges and best practices.

Drawbacks of a Cost plus pricing strategy:

• If you already have an in-house team, bringing in outsourcing specialists may present some challenges. Managers might encounter difficulties communicating and managing a dedicated team. Additionally, in-house employees could perceive the newcomers as competition and harbor doubts about their future within the company due to their lack of experience in such situations.

How to tackle this issue? Organize a meeting to clarify to your company’s employees the reasons behind scaling the team. Emphasize the mutual benefits of collaboration, knowledge exchange, and acceleration. Request your contractor to appoint a skilled Project Manager who can facilitate the integration of the dedicated team with your in-house one and address any concerns. Introduce communication and management tools such as Jira, Slack, and Microsoft Teams to facilitate seamless and transparent interaction.

• You must manage sick leaves and holidays and assume the same level of responsibility as with your company’s staff. Additionally, you need to ensure a consistent workload for your outsourcing team to avoid wasting money on downtimes.

How to tackle this issue? Request your vendor to grant you access to employees’ contracts and financial documents for transparent fee visibility. Prior to commencing work, discuss with your contractor the potential for swiftly scaling up or down your team to prevent overload or development process interruptions.

A Cost+ model in outsourcing is suitable for:

• Startups whose decision-makers have prior experience with outsourcing collaboration.
• Medium and large businesses, often product companies, that maintain an in-house team and require additional resources when their employees are overwhelmed or lack specific expertise.

To Conclude

For a mutually beneficial and seamless collaboration, your contractor must thoroughly assess your specific case to recommend the most suitable pricing model.

To do so, your vendor may consider several factors, including:

• the size and nature of your business,
• the availability and expertise of your in-house software team,
• your knowledge and experience in IT workflows.

This approach prevents both the client and the vendor from unexpected expenses and streamlines product delivery.