Understanding the Different Types of Custom Software Development Contracts

Once you decide to outsource custom software development, the next big decision is the company you will hire.

You’ll likely have a short list of candidates. One of the considerations should be what type of contracts each candidate offers.

The three most common software development agreements are fixed-price contracts, time and materials deals, and dedicated team engagements.

Which is best? The answer depends on your project’s scope, the engagement’s duration, and — most critically — your budget.

There are a few more minor considerations, but those are the big three.

Selecting the correct type of contract can significantly impact the project’s ROI.

In this article, we examine the different types of software development contracts to help you make the best choice.

Fixed-Price Contracts

If the custom software you need to build has a defined project scope, terms and conditions, and a short-term deadline, a fixed-price contract may be the best fit.

Pros

Pre-determined Cost: Because the total price is written into the contract, you know what you must budget for in advance. The developer is usually responsible for any cost overruns.

Fixed Deadline: With a fixed-price contract, you know exactly when you’ll have it because the due date is written into the agreement. If you need your AI chatbot to launch the day your new e-commerce site goes live, for example, this type of contract helps ensure it will be ready on time.

Cons

Technology: To hit the deadline, the custom software development company will leverage the techniques and technology they have the most experience with. It may or may not be the best way to build your solution.

Fixed Requirements: Because of the set deadline, you’ll need to cement all the requirements at the outset. It doesn’t leave much wiggle room if you need to make changes due to market shifts, a competitor’s actions, or other reasons.

Time and Materials Contracts

With this type of contract, you pay for the time the development team spends building your product and the materials used during the project.

Pros

Quality Focus: This type of contract focuses on quality more than a specific deadline. That makes it a good option for solutions requiring a high level of polish, compliance, or functionality.

Greater Flexibility: With no set deadline, time and material contracts are more flexible than fixed-price contracts. That makes them ideal for projects with evolving requirements or when the scope is unclear.

More Control: You have greater control over the project’s direction and can make changes as needed. This can be valuable if user needs change or similar market shifts occur.

Cons

Unpredictable Cost: Requirements changes, new feature requests, reprioritization, and so forth can drive up costs. Predicting the impact on your budget is challenging.

Undefined Release Date: Likewise, shifting deadlines make predicting the product’s release date difficult. Delays can result in a longer time-to-market.

More Involvement: To prevent scope creep and misunderstandings, you’ll need to be more involved in the development process than under a fixed-price contract. This need for oversight can take your focus away from other critical business activities.

Dedicated Team Contracts

With this type of software development contract, you hire a development team to focus entirely on your project for the specified period.

Pros

Cost-effective: Engaging a dedicated team gives you a full-time team for less than what you’d pay for hiring the same team in-house. The vendor is responsible for team benefits, administration and HR costs, equipment purchases, and other expenses.

Faster Ramp-up: You’re basically hiring a ready-made team all at once. Because the team has worked together before, there’s less of an onboarding and learning curve. Development can start almost immediately.

Highly Flexible: A dedicated team adapts easily to change. The vendor can quickly add staff to meet the need for new skills when requirements shift. And they can make it happen much faster than you could hire a new in-house employee.

Greater Efficiencies: The extended nature of the engagement with a dedicated team allows you to leverage continuous integration, which can be a significant advantage for long-term projects requiring rapid versioning and upgrades.

More Freedom: Once the relationship matures, the dedicated development team model integrates more smoothly into your workflows and requires little supervision. The team’s leader provides regular reports on the project’s progress, giving you and your in-house team more freedom to focus on other business activities.

Closer Collaboration: Dedicated team contracts allow for greater collaboration because the team has often previously worked together on other projects. They have established a methodology, communicate efficiently, and work comfortably with each other.

Cons

Communication Issues: Depending on the team’s location, time zone issues may hinder real-time communication. Their day might be ending as yours is beginning.

Cost Fluctuations: The dynamic nature of a dedicated team contract makes it harder to estimate the project’s final cost. You’ll need precise answers on project duration, the expertise required, and the work that will take place. Most projects requiring a dedicated team are dynamic in nature, however, so it’s hard to know what you need in advance. It’s not impossible, but you need to monitor costs for the first several weeks to estimate the project’s overall budget with accuracy.

Choosing a Contract

Choosing the right software development contract is a critical decision that can significantly impact the success of your project.

The dedicated development team model is a viable solution for long-term projects with changing requirements where you need to develop a product or expand your in-house team.

It’s a flexible model that adapts easily to change. What’s more, it delivers the most consistent results.

But if you need a simple app or have a limited budget, a fixed-price or time-and-materials contract might better suit your needs.

Consider the project’s scope, requirements, budget constraints, and your preferred level of control when deciding on the type of contract.

None of these contract types are a one-size-fits-all solution. All, however, require you to collaborate closely with your software development partner to ensure success.