Types Of Contracts In Software Project Management

4 Types of Contracts for Custom Software Development

Once you’ve entered into a contract with a web application development company, making sure the project stays on track and meets expectations is a goal for both of you. While signing the contract is a step in the right direction, making sure it’s the right contract should be your first step.

Most people simplify the contract down to how money exchanges hands, but it’s so much more than that! In reality, the contract drives behavior before, during, and after the project on both sides of the table.


There are different types of contracts to choose from when contracting custom web application development. A flexible developer will attempt to match the specific nature of the project with the contract, but a responsible developer will also advise you that the contract should share the burden fairly between both parties.

There are four types of contracts typically used in the custom software design industry:

1. Time and Materials Contracts

This is the classic; the software developer trades you hours for dollars, it’s simple and easy to understand. This agreement allows for payment to the developer even if the project takes longer than originally anticipated.
Pros:

The developer doesn’t rush building or cut corners to get the project done as quickly as possible.
It’s less complicated, and therefore the fastest way to get a project started.
You know exactly what you’re paying for.
It forces increased trust and communication.

Cons:

You have less control of the budget. As the buyer you assume most, if not all of the risk.

2. Fixed Bid/Fee

This is the second most common contract. You and the software developer agree on what should be built, the developer puts a firm price on it, and in a perfect world, that’s that.
Pros

The developer assumes all the risk in a fixed fee contract, the client has the peace of mind of knowing that the project will remain on budget.
It forces increased communication on the front end of the project. Everyone will have to know exactly what is being built.

Cons

If the communication up front goes wrong or the design process isn’t clearly laid out, it becomes the biggest risk to this contract type because with the developer assuming all the risk, they will perhaps change their behavior as a result. A client may find that the developer will act with self-interest in mind.
In a worst-case scenario, shortcuts can be taken to stay within budget resulting in subpar quality.
This contract is the most complicated way to get the project started, requiring the most up front work to do correctly which means increased design costs and a longer time to launch.
Even with the best laid out design process, change requests will still happen. As the client learns more about what they want/need from their software systems and their software developer, they will incur cost to make those changes to the project.

3. Fixed Budget

This contract is less common and more creative. With this one, the client and the developer agree that neither of them know enough to perform a fixed bid safely.

They also both acknowledge that the project has a targeted budget and there will be severe issues if it exceeds that. Together the client and the developer will work to assemble a plan to build as much as the developer can under that budget and will constantly check schedules and forecasting to ensure core obligations are being met.

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The secret strength to this contract is that the developer acknowledges a couple of industry truths; the last few frills of a project are generally the most expensive and are often not necessarily needed. Constantly focusing and refocusing on the core of the project will eventually cut out the stuff that isn’t first priority.
Pros

Collaboration and teamwork is a must, there’s no way to succeed with this unless everyone is on the same page throughout the project.
Communication is tight and consistent.
There is shared risk, no single party gets burned with this contract. Behavior and expectations are modified to make the project a success.
It requires focus, the client and the developer are focused on implementation with business objectives in mind. The developer isn’t focused on profit margin and the client isn’t focused on or worried about the budget.

Cons

A Fixed Budget requires a lot of trust and hard work with a new client/developer relationship.

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There is a risk that the client won’t get everything they imagined at the start. Even with good communication and modified expectations throughout the process, the client may encounter a level of disappointment.

4 Types of Contracts for Custom Software Development

Once you sign a contract with a web app developer company, make sure the project stays up and meets expectations is the goal for both of you. While signing a contract is a step in the right direction, ensuring the good deal should be your first step.

Most people simplify the contract to how to exchange money, but much more than that! In reality, contracts encourage behavior before, during, and after projects on both sides of the table.
There are different types of contracts to choose from when contracting for custom web application development. Flexible developers will try to adjust the project’s specific nature to the contract, but the responsible developer will also notify you that the contract should share the burden equitably between both parties.

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There are four types of contracts typically used in the custom design software industry:

1. Contract Time and Materials

This is a classic; Software developers trade you for hours for dollars, simple and easy to understand. This agreement allows payment to the developer even though the project takes longer than originally forecasted.
Advantages:

Developers do not rush to build or cut the way to complete the project as quickly as possible.
It’s less complicated, and therefore the fastest way to start a project.
You know exactly what you are paying for.
It improves trust and communication.

Counter:

You have little control over your budget. As a buyer, you consider the most, if not all the risks.

2. Fixed Bid / Fee

This is the second most common contract. You and the software developer agree on what to build, the developer puts a firm price on it, and in a perfect world, that’s all.
Pro

The developer assumes all the risks in the fixed cost contract; the client has the peace of mind to know that the project will stay within budget.
This forces increased communication at the front end of the project. Everyone must know exactly what is being built.

Counter

If forward communication goes wrong or the design process is not set clearly, it becomes the greatest risk for this type of contract because with the developer assuming all the risks, they may change their behavior as a result. A client may find that the developer will act with self-interest.
In a worst-case scenario, a shortcut can be taken to stay within budget to produce sub-standard quality.
This contract is the most complicated way to start a project, which requires the very first job to do right, which means increased design costs and longer time to launch.
Even with the best design process, change requests will still occur. As clients learn more about what they want from their software systems and software developers, they will incur the costs of making those changes to the project.

3. Fixed Budget

This contract is less common and more creative. With this, the client and the developer agree that neither of them knows enough to make a fixed offer securely.

They also recognize that the project has a targeted budget and there will be severe problems if it exceeds it. Together clients and developers will work to devise a plan to build as many developers under that budget and will regularly check schedules and forecasts to ensure core obligations are met.

The secret power of this contract is that developers recognize some of the industry’s truths; Some of the last decorations of a project are the most expensive and often unnecessary. Keeping focused and refocusing on the core of the project will ultimately cut out items that are not the priority.
Pro

Collaboration and teamwork is a must; there is no way to succeed with this unless everyone is on the same page from the project.
Strict and consistent communication.
There is a shared risk; no one party burned with this contract. Behavior and expectations are modified to make the project a success.
This requires focus, clients, and developers to focus on the implementation of business goals. Developers do not focus on profit margins, and customers do not focus or worry about the budget.

Counter

Fixed Budget requires a lot of trust and hard work with new client/developer relationships.
There is a risk that customers will not get everything they imagine in the beginning. Even with the expectations of communication and real expectations during the process, clients may experience a degree of disappointment.

4. Capped Budget With Accelerated Bonus

This contract is very similar to Fixed Budget, but with incentives built for quick delivery. Operating and working the same as above, this contract includes a financial reward if the developer finishes ahead of schedule and budget. Therefore, additional software developers provide additional incentives to perform as efficiently as possible.
Pro

Same as Fixed Budget, but with additional emphasis on efficiency.

Counter

Just like Fixed Budget, but focus on efficiency can cause too much emphasis on speed over quality.

So what does all this mean?

In short, it is important to understand the implications of a contract, not only regarding payment but also on behavioral motivation.

Any contract that forces collaboration is the way to go. We often warn clients about transferring all expenses to either party. Working as a team is the only way to complete a win-win project truly. We believe so strongly; it is rooted in our name.

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