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Contracts for Software Development Outsourcing

Now let’s cover those all-important contracts that help to ensure you get the outcomes you seek. Businesses use two primary types of contracts when outsourcing software development projects — The contract types are:

  • Time-and-materials contracts, which bill the project at an agreed-upon rate based on actual resources used and time spent by developers.
  • Fixed-price contracts bill the project at a flat rate, regardless of the time spent or resources used.

Time-and-materials and fixed-price contracts both have advantages and disadvantages. The best contract type for you depends on the requirements of your specific project.

Pros and Cons of Time-and-Materials Contracts

Time-and-materials models are the most flexible, as they can quickly be scaled up or down to accommodate changes in scope. For this reason, they’re most often used in projects in which scope and requirements are not set and/or likely to change (e.g., large-scale development projects).

Flexibility is the main reason clients choose time-and-materials models for software development outsourcing projects.

From staff augmentation to outsourced product development, clients prefer time-and-materials contracts. They can easily and quickly request change orders to scale resource allocation up or down to fit their changing business needs.

To illustrate, imagine you need more DevOps resources on your team. You’ve decided to look into staff augmentation outsourcing as a possible solution. To test this solution, you may want to start with one DevOps Engineer and a three-month engagement. But what happens if:

  • After the first five weeks, do you need more than one resource?
  • Do you want to keep your first resource beyond the initial three-month engagement?
  • Do you want to add one or two Backend Developers to your team?

With a time-and-materials contract, all of these adjustments can be made quickly — exactly when they’re needed — without complicating the original contract.

The one caveat to keep in mind with the time-and-materials model? The price you will pay is not always clear ahead of time. For this reason, it’s essential to find a trustworthy, established provider who will be transparent about their time-and-materials billing process and communicate with you regularly, thus eliminating the potential for any “surprise” costs.

Pros and Cons of Fixed-Price Contracts

Fixed-price contracts, on the other hand, are most often used in small, straightforward projects with limited scopes and/or fixed budgets. Although fixed-price contracts are more traditional, they’re not as widely used as time-and-materials models. This is mainly due to their inherent lack of flexibility.

Some clients choose fixed-price contracts because requirements, timelines, and deliverables are clearly laid out ahead of time.

You also know in advance exactly how much you’ll be paying. Although this may sound like a better deal than the time-and-materials contract, it can actually end up costing you more. As everyone knows, software development projects often end up being more complex than anticipated, involving more time and resources than initially estimated. After all, every project is unique. No two projects share exactly the same requirements, people, technologies, purposes, and limitations. This presents a challenge for complex projects.

Often, the scope must be adjusted, or changes have to be made to the deliverables (i.e., cutting unnecessary functionalities) to stay within the overall budget of the fixed-price contract.

Alternatively, some clients will elect to expand the scope of the original contract with a change order, although this will increase the final cost of the engagement.

Coreteams is here to help you in selecting the best software development outsourcing model