When outsourcing a software development project or establishing a relation with an IT outsourcing service provider, it is extremely important to make the right contract. There are three contractual models that are used in the absolute majority of projects.

Fixed price contract is the most wide-spread form of work in outsourcing. It is also the preferred way of working for a customer, because the client is always sure about the maximum expenditure on an individual project. However, in a fixed price model it is obligatory to have a clearly defined project scope and to keep it “frozen” till the end of the project. Naturally, change request will pop up half way, but a supplier needs to handle them through an established change management process. Remember the rule of thumb: if a change request (CR), submitted on a specification phase, costs you Ђ1, the very same CR but on a development phase can cost you Ђ100, and Ђ1000 if submitted on a test/acceptance/deployment phase. Most software outsourcers have burned themselves on fixed price contracts (very often the supplier has to finish the project their own cost) and usually approach fixed price contracts with extreme care and time/budget contingencies to mitigate the risk of failure at maximum. As a rule, this is the most predictable, but also the most expensive way to outsource software development projects.

Time & Material contract is usually used for projects where scope is not or cannot be well defined due to various reasons. Usually the supplier provides high level estimates and then submits weekly reports with actual hours worked. The customer is invoiced later on based on these actual reports. This is a good option if you use outsourcing to fight with sporadic “fires” on your projects and can rely on an outsourcer’s advice on what needs to be done. However, if a customer uses a time & material model to develop a software project with dynamic specification (especially is Agile methods are used, like Scrum), it is advised to “cap” the contract total price to a certain amount of hours planned + expenses + contingency. This way a customer is perfectly protected from a big surprise of an over-blown budget.

Offshore Dedicated Centre is definitely the most cost-effective and usually the surest way to outsource software development. Basically, this agreement presupposes that a customer “rents” a certain number of software developers (usually at least three) from an outsourcer for a minimum of six months. This model is equally beneficial for both parties for a number of reasons. An outsourcer provides CV’s of the available developers, a customer can choose the qualified developers, interview them and appoint on his fixed offshore team that is ready to start working immediately. All infrastructure, like work places, hardware, internet connection, employee benefits, etc. are taken care of by an outsourcer. Another advantage for a customer is resource continuity – outsourcer is obliged to fix certain software developers to the project, and these resources can be substituted only on permission (or demand) of a customer. This way the developers already understand the customer’s business and it will be considerably easier for a customer to start a second project with the same team. An outsourcer has a big benefit of solving resource allocation issue for at least half a year, and he is usually willing to compensate a customer for choosing an ODC model by providing considerable price reductions.

A good thing about outsourcing is that in the absolute majority of cases you can use the principle “no cure, no pay”. But although a contract is crucial, the most important is supplier’s professionalism and experience, because only this is the real guarantee that the project will be delivered on time and budget.