10 years of experience in delivering software have shown us that there is no one-size-fits-all budgeting solution for every business and type of project. Our role as a partner requires finding the budgeting model that best suits our clients’ needs. That’s why we decided to broaden the selection of budgeting models and introduce a new approach - target price.
Not that there’s something wrong with the models we’ve previously used - time and materials, and fixed price - it’s just that other approaches may be more accurate depending on the project’s character, timeline, scope, and other factors.
We found the target price model to work well with our Agile development approach and significantly assist in structuring Agile projects. See how it helps our clients and improves motivation and control over budget. See when and how we use this method and why it helps us build products in a cost and time effective way for our clients.
What is a Target Price Model?
Put simply, the target price scheme means sharing profit with the client when delivering a project below the predefined price, but also sharing costs when the budget is exceeded. This particular type of contract may lead to sharing a pain or gain between two parties. How do we calculate it?
As a software development company, we estimate project costs taking project goals, timeline, and available budget into consideration.
The target price is established before the start of the project. Later, the actual amount of money that is overspent or underspent is equally shared between the client and the software vendor company. That’s why the Target Price model can act as a motivational factor for both parties to deliver the project on or under a budget.
Who Should Use the Target Price Model?
It’s perfect for businesses that rely on a regular, predictable revenue stream, as lack thereof usually makes the adoption of the time & materials (T&M) model more difficult.
It’s also a viable choice for companies sustained by funding or one-off cash infusions such as government support, European Union grants, or venture capital investment.
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