Why top developers love fixed pricing

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If you’re building tech externally then you have several options available to you. The main distinction is between agencies (including dev shops) and freelancers. Price, quality and time are the key three key considerations and they’re interrelated. How you setup the billing structure will have a tremendous impact on time to delivery and the quality of the deliverables.

How You Can Pay

The two main ways you pay freelancers are either fixed price for a scoped tech build or hourly. Which ones makes the most sense for the customer and creates alignment on quality and time? The answer depends on the quality and objectives of the developer (we can assume customers always want top quality, delivered fast for low prices, ie. the three sides of the triangle).

Freelancers rarely prefer a fixed price payment unless the it’s significantly higher than market rate. That’s because they’ve been burned by scope creep or unreasonable clients so they protect themselves by accepting hourly payment. That means you’ll often be paying them hourly which leads to misaligned incentives between you and the freelancer.

The Problem With Hourly Pay

When you’ve agreed to pay a contractor hourly then you naturally incentivize them to increase their billable hours which runs counter to your desire to have them build high quality tech in the shortest amount of time possible. Anyone who has ever hired a lawyer can confirm this from firsthand experience. Clearly this isn’t ideal.

Align Incentives With Objectives

The ideal is to get high quality tech built in the shortest time frame possible. The best way to ensure you get high quality is to use ‘A players’ and then align their incentives with your objectives. One of the key traits of A players is that they are direct about their needs and desires and they want incentives aligned just as much as you do.

So how do you make sure that what the developer wants matches your goals? We’ve thought deeply about this at Gigster because it, at least at first, appears to be a fun and difficult problem. The solution is surprisingly elegant.

Top Programmers Prefer Fixed Price Projects

The Case For Fixed Price

Paying top developers a fixed price leads to the optimal outcome for both sides. Top developers are significantly better in terms of productivity and effectiveness than average developers. It’s a popular meme that top developers are 10x more effective than the average developer but let’s be conservative and say they’re 5x more effective.

Let’s say there’s a project that would take the average developer 20 hours to build. To keep the mathematics easy let’s say $100 an hour is the market rate for a web developer (to those of you reading this in San Francisco please try and control your laughter). An average developer would charge you $2,000. If they’re desperate for money it’ll be less, if they’re inundated with work it’ll be more. No surprises so far.

Consider the 5x developer. For them this is a 4 hour job. 5x developers can command a 2x salary in the work marketplace, sometimes more but never 5x. If the top developers can command $200 per hour and complete the job in 4 hours then the price will be $800. That means you get a better result faster and for significantly less cost. The developer is also happy because they’re making double the market rate.

This makes even more sense when you look at take-home pay versus fixed pay. If you assume both developers are in the Bay Area with similar expenses then at the market rate the average developer will keep 10% of their salary. The 5x developer who is making double the market rate will keep 55% of their salary. On a take-home basis the 5x developer is getting 5.5x the average developer.

Why Fixed Price Is Fundamentally Better

Fixed pricing is a mechanism that lets the top developers arbitrage the gap so they can realize the true market value of their output. The only way to earn more is to become a founder. When that happens the talent pool becomes that much smaller which only increases price.

If you were to start off by offering hourly pay then the better developer would still have to justify their higher rate. That is a more cumbersome process than the alternative. In the fixed price example they can underbid the rest of the market, commit to a faster timeline and they’ll have references and a resume that will address any concerns you have. They’ve derisked the decision for you.

Top Developers Prefer Fixed Price

It turns out that fixed price bids are likely an indicator of a high quality developer. The next time you use an external provider to build your tech only pay fixed price. You’ll get better developers who’ll do the work in less time. You’ll effectively save yourself a lot of money, time and stress working this way.

Interesting in working with Gigster? Apply to become a Gigster today.