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Fixed-price vs. time and materials contracts

1/13/2012

 

Brett Miller, president of a leading custom software solutions company, recently shared some tips regarding software development contracts in an article for the website Mashable.

According to Miller, one of the most basic things to determine is whether to opt for a time and materials contract or a fixed-price software development contract.

When contracting with a software developer, many businesses favor fixed-price contracts, in which the software company agrees to pay for any cost overruns on the project. However, Miller cautioned this often leads to higher initial bids, as software companies account for potential additional expenditures. Then, if a project ends up costing the developer less than anticipated, the business is the one losing money in a fixed-price scenario.

The software developer generally gets paid hourly under a time and materials contract. Miller pointed out that the obvious risk in this situation is that an unscrupulous software company will work at a slow pace to maximize billable hours. One way to minimize this risk is to pay the developer on a two-week retainer cycle, so that every two weeks, the business evaluates the project's progress before paying out more money to the developer.

In addition to hashing out the contract elements Miller described, tech businesses might be discussing intellectual property clauses more frequently in 2012.

TechTarget recently spoke to a number of SAP customers who expressed dissatisfaction with SAP's standard contract language regarding IP liability. The customers said they do not want to be held liable in the event a third-party sues for intellectual property infringements related to the SAP products they purchased.