What are the most commonly used types of software development contracts?

May 16th, 2021

Any software development project operates on resources that were designated for them by the client and the development team. It is very important to choose the correct type of contract in order not to cross those limits and get the required quality of the final product. In this article, we will review the financial side […]

Any software development project operates on resources that were designated for them by the client and the development team. It is very important to choose the correct type of contract in order not to cross those limits and get the required quality of the final product. In this article, we will review the financial side of this topic, explain what are the differences between them, and discuss why the choice of the correct type of software development contract is very important for both clients and developers.

Commonly used types of price model contracts

 When choosing the financial strategy for software development projects there are 2 main types of contracts that are executed between client and development team:

  • Time and materials contract
  • Fixed price contract

Usually, the development team or their representatives offer the client which choice they prefer for the specific project. This is a good solution for clients who are inexperienced in software development industry projects yet. However, it is absolutely acceptable for clients to take part in the discussion of this important choice if they want to. The choice of the contract type usually depends on a project management methodology that will be chosen for the implementation of the project. It also can be very hard to change the type of software development contract in the mid-development phase.

Let’s see what are the main rules and ideas behind the main types of price model contracts!

Time & Materials contract as a software development contract

This type of contract is the most popular among modern software development projects. The main idea of this type is that client pays for the exact hours that developers worked on the project and the materials that were required to implement it. As for “materials” we usually mean software, devices, and everything that the developers may need for successful implementation of the requirements. This is a great choice for projects, which have an idea but don’t have all of the details stated in the requirements yet. In such a case, it is very hard to estimate the time scope for preparing the product and, as a consequence, the inability to precisely estimate the price of the project.

The main advantages of Time & Materials contracts are:

  1. Strong flexibility for the client, who can prioritize tasks in the project at any moment of the development phase.
  2. The client has supervision over the development team, can correct ideas, and knows exactly what he pays for.
  3. Developers do not find the fastest solution to fit in the time scope, but also control the quality of the product.
  4. You can start the project faster even if you don’t have all the requirement details prepared yet.

However, there are also disadvantages in this type of software development contract, which you should know before making your choice:

  1. It is hard to predict the final budget of the project – flexibility creates the ability to add requirements as much as the client wants, which may increase the initial budget very noticeably. In this case, the client is the one who takes most of the risks.
  2. Such an approach requires control from the client – usually, people want to control the budget as much as possible, which may take more time and effort from both client and the development team.

Even though this approach is not ideal, most of the projects choose it because of the great flexibility and ability to adapt to the changes.

Fixed price contract – another type of software development contract

A fixed-price contract is another choice for a software development project. Even though it is not as popular as Time & Materials contract, it is usually presented as a safer option for the client budget. The main idea of this approach is that the budget is precisely stated even before the development stage starts. In such a case, the user knows the price and can be sure that it will not change massively by the successful release of the final software product. Both client and software development team discuss the requirements and the budget which can cover all of the required details for the product creation.

The main advantages of the fixed-price contract are:

  1. The development team is not focused on profits and, as a consequence, does not require constant supervision from the client.
  2. New efficient solutions can be created when the budget is fixed.
  3. The client does not take all of the possible risks – they are split between the development team and the client, both of which want to reach the goal without overshooting the stated budget.
  4. The budget is known beforehand and will not grow unexpectedly.

On the other hand, there are disadvantages that can not go unnoticeable:

  1. Changes are hard to fit in the project if they were not stated in the initial requirements – most changes will transform the budget scope, which is highly unwanted in fixed-price contracts.
  2. If the requirements and design stages are not entirely clear for both sides, then the project has a high probability of failing – miscommunications on planning stages may bring problems later in the project, which can be too expensive to fix.
  3. The project can not be started immediately – the detailed planning stage requires time from both the development team and client, which may delay the start of the project, and, as a consequence, delay the release of the product to the market.

A fixed-price contract can be a nice fit for your project but is absolutely not a risk-free solution.

Difference between fixed price and times and materials contract

 So, how do you choose between those two software development contracts?
There are project characteristics, which usually fit only one of these contract types. For time & materials contract we would recommend projects which:

  • do not have all requirements prepared,
  • need a fast launch,
  • have a possibility of scaling the budget for quality purposes,
  • will require changes implemented any time later,
  • can be supervised and reviewed by the client constantly,
  • want the highest quality possible.

For fixed-price contracts, the most obvious characteristics of a suitable project are:

  • the small scope of the project,
  • requirements are clearly stated and do not plan to change,
  • clients do not have time/desire to control the process,
  • budget is fixed and does not plan to scale.

Each project should be treated individually and the contract is chosen based on its characteristics. We recommend both client and software development team take part in the final decision.

Software development contracts used by BWC.Technology

BWC.Technology can analyze your project and provide you a solution, which will be the best fit for your budget and requirements. Our team has experience working with both “fixed price” and “time & materials” software development contracts and can help you to make the correct decision.

We can optimize your IT processes, aid in the creation of new ones, or help you benchmark your business against the solutions used by your competitors.

BWC.Technology will guide you through the process of transforming your idea into a working digital product.