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Why do software development companies use a prepaid model?


Margaret Golubeva




Jul 29, 2020

Software development outsourcing is probably one of the best choices you can make for your project. This is a win-win option that allows you to save up to 60% of your development budget.

However, the biggest concern that most startuppers have when it comes to outsourcing is the issue of trust. Trust becomes even more pressing when you realize that it could be necessary to make a payment in advance.

Keep in mind that advance payment is normal practice and you should never be afraid of the prepaid model if you are going to work with a really reliable vendor. 

In this article, we are going to explain why prepayment is beneficial for both the parties to the transaction, as well as point out how to find a reliable software development company. 

Prepaid model in software development outsourcing — why is it beneficial both for a customer and a vendor? 

As we’ve already stated, the prepayment model in outsourcing is quite a normal practice that has no pitfalls. This way of making a payment is beneficial and convenient for both vendor and customer since money transfer is a good foundation for mutual trust.

For a vendor

Here are two main reasons why outsourcing partners may ask you to make a payment in advance: 

Ensure serious intentions

Startup development is a very demanded service, however not all startup initiators are serious about their ideas. Working according to a prepaid model helps a vendor to make sure that he is going to partner with a customer who is really ready to invest in his startup. 

Do not worry about developers’ salaries

At that moment when your vendor assumes obligations to develop your project, he also assumes obligations to pay for the work of developers who will assemble your application brick by brick. The money you paid in advance can form a payroll fund for developers, for example, in case the client decides to stop the project halfway.

For a customer

Here are the main reasons why payment in advance may be convenient for the customer as well:

Add clarity to your project budgeting

Since most startups are developed within strict financial limits, paying in advance may help you manage your development budget more wisely and immediately understand what sum you need to pay to start the process. 

Focus on core tasks

So, when the money issue is solved and the sum is transferred, you may calmly focus on other tasks regarding your startup — for example, look for ways to connect with a target audience and develop marketing strategies. 

How prepaid model is matched with a fixed price, time and materials, and decided team contracts

As you probably know, there are three types of contracts you may sign with your outsourcing partner. 

Let’s take a brief look at each of them and understand how they can be related to a prepaid model:

Fixed price. As it is clear from the name, a fixed price contract perfectly fits the prepaid model since it is possible to pay the total sum immediately and calmly wait for the readiness of your project.

Time and materials contract . Before you sign a time and materials contract, your vendor will make an approximate estimation of how much time and materials your project needs. So, you will be able to pay for the resources already estimated but in this case, you should be ready to add some money at the point when your project is almost finished.

— As practice shows, dedicated team contracts are the most expensive ones. However, in this case, it is still possible to make an estimation and find out how many working hours each specialist from your dedicated team needs to finish his/her part of the project. So, as it is with the previous type of contract, you will be able to prepay their labor but some adjustments are still possible. 

How to find a vendor you’ll be willing to pay in advance

So, as you may see, the prepayment model in outsourcing is a convenient collaboration option. However, the most important task is still to find such a vendor who will inspire trust and reliability.

Here is a search strategy for you to use to always be sure that you will get top-notch quality when making payment in advance: 

Start by choosing the country you want to outsource development to

As you know, the core idea of outsourcing is to save your resources while getting access to the talent pool worldwide. You should carefully analyze the IT market in the country you are going to outsource to.

For example, collaborating with top Swiss companies may cost you a fortune, however, total savings are also not the best bet. Boeing may share some experience, unfortunately. 

Shortlist the potentially suitable companies

Deciding on a country, jump to and shortlist ten companies that are potentially suitable. Surely, you should pick the ones with the best ratings and long existence on the market. 

Take one more look

Take one more look at the companies you’ve shortlisted. Make sure they have projects somehow similar to yours or at least those that are from your niche. Subscribe to their newsletters, read the latest articles on their blogs, and check their social media profiles to get the first, full impression. 

Ask each company for the first consultation

Make sure to evaluate how the company staff is communicating with you, what questions do they answer, and what is their response time. 

Personally verify the authenticity of the reviews

As you know, there are a lot of fake reviews. That is why you shouldn’t be guided by online published reviews only. Instead, ask your potential partner to share the contacts of his previous customers. A reliable company will never refuse, and you will be able to get honest opinions firsthand. 

Discuss the contract type they may offer you

Make sure that your potential vendor is going to offer you such a contract type that really suits your project. For example, there is no necessity in a dedicated team if you are going to create a small app with an already clear workflow. 

Don’t hesitate to talk about money

Feel free to ask about money and sound your expectations before making a transfer. Find out what the development company may offer you, what payment methods they accept, whether it is possible to break a payment up, and what sum do you need to pay in advance to start the development process.

Keep in mind that payment in advance is ok but you should know what you are going to pay for and how your payment will be legally protected. 

Insist on signing an NDA and a contract

NDA is a core document to protect your app idea and code. Always insist on signing one since this is one more way to check the reliability of the company you are going to partner with. A trustworthy organization will never refuse to sign all the necessary documents. 

Choose the one that suits you best

After working through all these points, make your final choice. Stop your search with a company you feel most comfortable with. Try to analyze everything objectively but never turn your intuition off. Sometimes our intuitive choices are the best ways to go.


The prepayment model in outsourcing isn’t going to bite off a huge chunk of your budget. This is one more way to inspire trust between parties, as well as to plan your budget more wisely and clearly.

By the way, we are ready to continue this discussion in a private conversation so you are welcome to drop us a line! 

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