The most easily understood pricing model is fixed-price. You tell us what you want built. We respond with a price. Contracts are signed and at the end of the day, some software is delivered and a check is cashed. Pretty simple, eh?

Yes, in theory. In practice, it rarely happens this way. The process of crafting custom software is so full of unknowns that the best business efforts to specify the project are inevitably riddled with uncertainty. As a result, fixed-price contracts are always subject to constant and costly renegotiation and almost always end up costing more or delivering less that what is needed... or both.

There are many instances where fixed-price models work, like cars, groceries, pizza, etc. Fixed-price models work in these instances because the producers of the product know exactly what the cost of the product is before delivery is made.

Custom software projects are amorphous by nature, have budgetary and time constraints, and therefore should not rely on an educated guess. Every estimate at the beginning of every software project is nothing more than an educated guess.

Time & Materials contracts reduce the costs of having to hash out every detail ahead of time and reduce the risks of unmet expectations by allowing the flexibility to change the project as more information on how the system needs to function becomes known. Time & materials contracts also create a client/developer "team" where both parties are working toward the same goal, which is the completion of the project that meets the requirements without wasting valuable resources in conflicts over budget and scope.

Whether you need custom software for a business requirement or you have a wild idea for a new product, it is a better choice to not to fall victim to the fixed-price trap. The product will ultimately be better and you'll be happier having maintained control over the product. Make the development firm your partner, and everybody wins.