Two Main Models When outsourcing software development, costs and payment structure are typically the most important. Customers want to have a complete understanding of how they will…
Two main models
When outsourcing software development, costs and payment structure are typically the most important. Customers want a complete understanding of how they will be charged, based on what elements, and how changes will be handled. Most software outsourcing contracts use a fixed price model or a time and materials model. Let's take a look at what this means before we get into the advantages and disadvantages.
Fixed price model : This type of contract is independent of time spent or resources used; instead, the project is billed at a fixed rate. The fixed price lists well-defined requirements and procedures, a clearly established project and a corresponding fee that is not subject to negotiation.
Time and materials model : This type of contract occurs when a client agrees to pay for the developer's time spent on the project at a set rate, as well as for the materials or resources used. Time and materials contracts are often used when the project is likely to change, increase or decrease, or if the entire scope of the project cannot yet be predicted.
Both types of contracts have advantages and disadvantages.
A Deeper Look at Fixed Price Contracts
Fixed price is the most traditional type of contract used for software outsourcing, although this is changing. Clients often use fixed-price models when they have a precise budget or for a small project that is limited in scope. The most important benefit of this contract is that customers know exactly how much they will pay; there are no surprises when the bill arrives. Because fixed-price contracts typically have strict deadlines, management is often relatively simple.
The main reason customers are moving away from this model, however, is that there is no flexibility. Often in software development, the scope of work must be expanded (up or down), and this model does not allow for that. Clients must then make any necessary changes or updates during the project. There is also typically less reporting with fixed-price models, which can be frustrating for clients looking for regular updates on project workflow.
A deeper look at time and materials contracts
Time and materials contracts, on the other hand, are highly flexible, which is why companies that are working on a large-scale software development project often go this route. Customers have the ability to increase workload by adding more developers to a project, or stop work completely if they encounter problems with funding. Furthermore, when the scope of work changes or updates or revisions are required, this does not complicate the contract in any way.
Companies often do not know the full scope of work, but are ready to begin elements of the development process, and time and material agreements allow this, following the agile methodology. Customers also enjoy more reporting so they can understand how much time and resources are spent by each team member on each project feature.
The disadvantage of time and materials is that customers do not have a fixed cost at the beginning of the development process. If you are working with an unreliable outsourcing partner, this could be a problem. Time and material often require more involvement in the process, which can be good or bad for customers depending on their wants and needs. However, this problem can be alleviated by working with a transparent outsourcing team that consistently reports costs.
Deciding between fixed-price contracts and time and materials contracts
Before deciding which type of contract works best, consider the scope of the project. If the scope is not completely defined or subject to change, then a deadline and material may be a better option. If the project is smaller and defined in each required functionality, it is possible to use a fixed price contract. Talk to your outsourcing partner to see what they offer and how each works within the confines of the project, then decide which option works best for future work.
If you liked this article, be sure to check out some more articles about outsourcing.
- Why outsourcing is perfect for periods of economic uncertainty
- Top 7 Industries That Benefit From Software Outsourcing
- Software and cloud services outsourcing: growing demands for scalable business solutions
- Benefits of Software Outsourcing: Maximize Your Market Visibility
