Contract types for outsourced software development projects

¶ … Contracts

Outsourced Software

Project specifications: The best type of contract to use

The standard contract used in most software development is that of a procurement order. A procurement order is a standardized document, usually for routine agreements (Sollish & Semanik 2007: 83). However, it would not be suitable for a software development project which is likely to be extremely volatile, given that a procurement order specifies in concrete terms precisely the prices, deliverables, and all needed instructions of the project (Sollish & Semanik 2007: 83). In this instance, a procurement order would be unsuitable given that specifications and requirements may change drastically throughout the project life cycle (Sollish & Semanik 2007: 83-84).

But another option is using requirements contracts or indefinite delivery contracts which locks in pricing and lead times and mandates the signer's commitment to purchase all of the project's requirements before the fact, even though specific amounts and delivery dates are left indeterminate (Sollish & Semanik 2007: 83). This would ensure that the quantities needed and dates for deliverables could change as the needs of the project became clearer, while still securing a commitment to complete the project requirements and thus not leaving the company 'high and dry' if the firm changed its mind. The downside is that given that pricing and lead time are not locked in, the profit yielded by the project might be much smaller than anticipated if the prices and the time to complete the project were not estimated within a reasonable cost framework.

A third option is a fixed price contract, in which stipulates the terms of the contract at a specific price regardless of the eventual cost to the supplier (Sollish & Semanik 2007: 84). However, it is unlikely that a supplier would agree to such an arrangement if the requirements would be likely change, and the items specified in the initial contract might even not be necessary in the final version. One way to make the fixed price contract structure more attractive is to offer a fixed-price-with-economic-price-adjustment contract which allows for pricing adjustments thus making allowances for possible unforeseen circumstances which could affect the scope of the uncertain project (Sollish & Semanik 2007: 84). Both escalation and de-escalation of prices are permitted in a manner which can be mutually beneficial and fair to the needs of both the procurer and supplier (Sollish & Semanik 2007: 84).