Dedicated Development Team Pricing Models: A practical guide

The pricing model you choose can directly influence the total dedicated development team cost. With the same offshore dedicated team, different pricing models can result in different final costs that you have to pay for. As such, determining the pricing model is essential to estimate the software development cost

In this article, we will break down some common pricing models, providing Singapore-based companies with deeper insights to make the right selection decision.

Key takeaways

The pricing model directly impacts the total dedicated development team cost, as each model has a different calculation method.

The most common pricing model is Monthly Retainer, when client pays a fixed monthly fee that is agreed upon from the outset.

When working with offshore software dedicated team, you can combine different pricing models (typically the hybrid pricing model) to leverage the advantages of them while reducing the limitations.

Before deciding on the pricing model, client should consider some key factors, including budget predictability, scope, payment, and the level of commitment of vendor.

What is a Dedicated Development Team Pricing Model?

What is a pricing model?

A dedicated development team pricing model determines how your business pay for a group of software engineers who work exclusively for your project. Your business does not pay for the developers' salaries only; you pay for a whole developer team, with ongoing collaboration, management, and support.

Why choosing the right pricing model matters

While cost is one of the most important consideration when outsourcing to offshore team, pricing model has the greatest impact on the total software dedicated development cost. There are many pricing models with different advantages and limitations. Understanding the pros and cons of them can help you optimize cost while still maintaining the software development quality.

Also, choosing the right pricing model can help companies control the cost and make sure that it aligns with the budget, avoiding unexpected expenses. So, what is a good pricing model for hiring offshore dedicated development team? A better pricing model does not always lead to lower total software development cost. The right one should meet the project requirements, while minimizing the risk and ensuring vendor commitment.

Common Pricing Models you should know

There is no perfect pricing model that can fit into every software development project. The selection decision depends on your requirements, budget, and flexibility. Here are some common pricing models when hiring a dedicated development team that you should know.

01. Monthly retainer

Monthly retainer is the most common pricing model. You pay a pre-agreed fixed monthly fee to a dedicated team of developers working on your project or product. Both sides will agree in advance on the scope, hours, and the level of capacity provided by the software development company. The client can flexibly use that capacity as needed within the contract instead of being fixed to each deliverable.

Cost = A pre-agreed fixed monthly fee

The total development cost is predetermined each month, making it easier to plan the budget and control.

No need to resign the contract for each small arising task.

Developers gain deeper domain knowledge and insights over time, increasing the productivity.

When applying the Monthly Retainer pricing model, clients have to pay the same amount of money even when the workload is low. Also, when the contract does not allow carry over, the unused capacity is wasted.

When to choose: Monthly Retainer is best fit for software development projects with stable workloads, continuous development needs, and many small tasks arising monthly.

02. Per-person pricing

Client pays a fixed fee per developer per month. Each role has a pre-agreed monthly rate. Cost will increase or decrease depending on the number of people added or removed.

Cost = Number of developers x Monthly rate per person

With this pricing model, clients can easily estimate their monthly budget, even when adding new developer to the project. However, similar to the Monthly Retainer pricing model, clients still pay a fixed monthly fee per person, even when the workload is low.

03. Time & Materials (Hourly Billing)

With the Time & Materials model, your company pays for the actual hours spent. Each role in your offshore dedicated team has a different hourly rate which is agreed upfront, depending on the market and level of developer.

Cost = Actual hours spent x Hourly rate

The most notable advantage of this pricing model is the high flexibility. Clients do not need to lock the scope from the outset. Instead, they can change the requirements and priorities during the development process. Also, as they pay based on the actual hours worked, scaling becomes easier (increasing/ decreasing working hours or technical expertise).

However, this model makes it challenging for Singapore businesses to estimate the total cost. When the project becomes more complex than expected, additional effort can lead to increased development cost.

When to choose: Time & Materials is suitable for projects with undefined scope or changing requirements, and companies can not determine the needed effort. For example: MVP discovery, R&D projects, Agile development, or long-term product development.

04. Milestone-based payment

Instead of paying a fixed fee monthly, with the milestone-based payment, client pays when the offshore dedicated development team reaches certain deliverable, meaning that client only pays for the result.

Both sides will agree on the acceptance criteria for each milestone, and the project cost will be determined upfront. As the client does not pay the full cost upfront, this pricing model helps reduce financial risk and increase cash flow flexibility.

However, this pricing model can lead to acceptance disputes regarding whether the milestone has been completed. Also, scope changes can affect the milestone and payment, making this pricing model unsuitable for Agile software development.

05. Team-as-a-services (TaaS)

Client hires an offshore team on a subscription/ recurring fee basis, paying a recurring fee (typically monthly). Client does not pay for each deliverable, but for the capacity and expertise. Even though it is relatively transparent, this model is not flexible.

Team-as-a-service is suitable for Agile software development, as clients can change tasks and priorities without pre pricing each feature. When the scope changes, they can add or remove people from the team. However, applying this model requires clear governance to manage offshore dedicated development team effectively.

06. Hybrid model

The hybrid pricing model combines a fixed monthly base with additional flexible billing for extra tasks. The excess capacity is calculated at an hourly rate, daily rate, or resale rate, depending on the vendor.

With hybrid pricing model, the company can still predict some costs based on retainers. This model is suitable when workload only increases for a short period, and the client does not want to hire additional full-time resources. However, tracking and reporting are necessary to determine actual resources used, as well as clear contract terms to avoid disputes.

Choosing Pricing Model: What to consider

Budget predictability

First of all, clients have to define whether they want to know the exact cost from scratch or they are willing to accept the cost fluctuation. If your project has a fixed cost and you can not go beyond that number, the Monthly Retainer or per-person pricing is a better approach. On the other hand, if the budget is flexible, you can consider other pricing models.

Project scope

Then you have to check whether the project scope changes. For new projects (MVP projects or startups) that need constant adjustments, pricing models with high level of flexibility are suitable as they allow implementing on-demand tasks without procedures. By contrast, if the project scope remains stable, the Monthly Retainer or per-person pricing makes it easier for companies to plan budgets and estimate costs.

Payment & Cashflow

When choosing the pricing model, it is necessary to know when the client wants to pay, the payment method, as well as the level of predictability of cash flow.

Upfront payment: Clients pay the development cost before the project starts. It is suitable when client wants to secure the resources or the software development company requires upfront commitment.

Milestone-based payment: Clients want to pay after each milestone, helping them allocate cash flow based on the project progress.

Monthly payment: Clients want to pay the total cost monthly.

Actual usage payment: To ensure the cost optimization and reduce resource waste, clients just want to pay for the actual hours spent.

Vendor commitment

Do you need the commitment regarding the specific outcomes, capacity, or just the resources provided?

Resources commitment: The offshore dedicated development partner just needs to provide enough resources, including the roles needed and working hours, without any further outcomes commitment. In this case, you can consider a per-person pricing model or the Time & Materials.

Capacity commitment: The development vendor has to provide a dedicated team for clientin a certain period. As such, Monthly Retainer or TaaS is a fitting model.

Outcome commitment: As the payment is linked with specific deliverables, the Milestone-based pricing model is a good choice.

Final thoughts

The fact that pricing model impacts significantly on the total offshore dedicated development cost does not mean that it is the only factor. To estimate accurately the software development cost, Singapore-based companies have to consider other aspects. Each pricing model has its own benefits and drawbacks, requiring business leaders to understand and consider carefully before making decisions.

Also, these pricing models do not always stand alone. Businesses can flexibly combine them to optimize the total software development cost.

Ramping up a dedicated development team with the right pricing model

Adamo APAC is the Singapore-based office of Adamo Software - a premier AI and software development company in Vietnam. We help businesses across Asia Pacific build a dedicated development team within 1 - 2 weeks, combining highly skilled IT talent in Vietnam with Singaporean leadership. Our offshore software development team is integrated with your workflow and roadmap, led by your direction.

You can easily scale up when scope expands and scale down when scope reduces, with a notice period. Our offshore team will work exclusively on your project, without any shared resources.

Do you need to build an offshore software development team in Vietnam without the long recruitment period? Let's discuss your needs.