[meteor_slideshow slideshow=”arp1″]
The Topic of discussion is how to manage an outsourced software development project in which specifications and requirements may change drastically throughout the project life cycle. And the type of contract that is most appropriate in this situation. You are to write a separate follow up discussion from the two (2)post below (each discussion differently), while raising one interesting but valid questions for each post.
Discussion post 1
INTRODUCTION
Outsourcing is a binding contractual agreement of some aspects of business functions that a client hands-over to a specialist in that area. The aspect handed over normally includes both the planning and management as well as the operations of such functions. This move according to Towner (2007) enables the owner organization to focus mostly on their major competencies. In IT outsourcing, this move is usually a complex one but major issues usually address service levels, assets to be transferred, including how long the contract would last and when/how it would be terminated.
As a general rule, every software outsourcing contract has embedded in it the approach of software development, scope of whatever services it would be needed for, assumptions and what it contains, as well as the prices and patency rights. It also includes how long the contract would last, what are the various responsibilities and from whom, resolutions of conflicts and how the contract should end. Brooks (2012) posits that there are four main types of software outsourcing contracts which as they appear, both adds risk to the end user while lessening such risks for the supplier or the services provider. These are:
a. Time and Materials – this type of contract is used when there is no estimation of an agreed deliverable in a certain amount of programming needed, like the requirement of new techniques. It is the end user or customer that bears the costs based on the agreed rates.
b. Fixed Price Contracts – this type of contract, unlike time and material has an estimated programming required amount to enable creation of agreed deliverables. Within the contract, clauses are provided in case of defects or delays in deliveries.
c. Revenue Share Contracts – this type of contract is used where the customer is also selling to other customers, which enables the software provider to reduce the cost so as to get certain percentage from the sales.
d. Hybrid Contracts – this type of contract as the name goes can be combined with the various types mentioned above.
Brady (2009) asserts that to engage software development contractors, many contract types are easily available like in addition to the above stated ones, he adds:
i. Firm Fixed Price (FFP) – this contract type is favored by most firms where they are also known as the lump sum. Here there is a fixed price that is not subject to variation or adjustment as a result of cost of performance. Most sellers or providers in this type of contract usually ‘build-in’ contingency costs.
ii. Fixed Price Incentive (FPI) – here the contract is very complex with target price, profit and cost, including ceiling price and share ratio.
iii. Cost plus Incentive Fee (CPIF) – the formula for sharing the accruable cost savings is normally predetermined in this type since the seller is paid agreed fees plus bonuses.
iv. Cost plus percentage of cost (CPPC) – Apart from the payment that the seller gets for performance, he gets extra agreed percentage of the cost as profit.
v. Cost plus Fixed Fee (CPFF) – in this type of agreement, the fixed fee for the seller is also paid with his profit fees and this does not change or differ from the real cost except when and where the scope of the work has changed.
CONCLUSION
I would favour the Cost plus Fixed Fee (CPFF) which Brady (2009) describes as a contractual agreement that lets the seller get the fixed fees plus profit fees that would not change unless the scope of work has changed. Langford (2007) calls it Cost Reimbursable Contracts which best suits uncertain circumstances that would likely affect both the delivery and cost of the project.
References:
Brady, K. (2009) Types of Contract? [Online] Available from: http://www.claretyconsulting.com/comments/types-of-contract/2009-08-04/ (Accessed: 14 December 2012).
Brooks, P. (2012) Types of Software Outsourcing Contracts. [Online] Available from: http://www.ehow.com/about_557254_types-of-software-outsourcing-contracts.html(Accessed:14 December 2012).
Langford, J.W. (2007) Logistics: principles and applications. 2nd ed. New York: McGraw-Hill. (cited in Laureate Educational lecture Notes CPM Week 6).
Towner, A. (2007) Software Contracts and Liability. [Online] Available from: http://www.dcs.bbk.ac.uk/~sven/is/ischap2.pdf (Accessed 14 December 2012).
Discussion post 2
The selection of a contract stands in the evaluation of various factors, including schedule constraints, level of project definition, project size, local economic climate/conditions, resource available, company financial status (Floyd, 2004) and organization risk aversion. Selecting a contract type is indeed a significant strategic decision that determines how the supplier is paid and how risk is allocated between parties (Sollish et al., 2011, p. 389).
There are three broad families of contract: Fixed Price, Cost reimbursable and Time and material (T&M).
The Fixed Price contract is an agreement that specifies the fixed total cost for the product, service, or result to be procured (Sanghera, 2010, p. 174). This contract has the advantage to share the risk between the seller and the buyer; the seller indeed knows the extent of his liability before he proceeds (Griffiths, 1989). Another advantage is the contract administration that is limited for the buyer: control can be applied by the mean of SPI (Schedule Performance Index) and CPI (Cost Performance Index). In the other hand, the scope or work and performance requirements must be clearly identified, which can delay the procurement process and contract award. During the contract execution, any changes will have to be processes through a formal change order. This process is equivalent to a procurement process, with significant effort on negotiating on the cost and time impacts on the supplier deliverables.
The Cost Reimbursable contract assure the supplier that the buyer will cover, at a minimum, agreed-upon costs up to an agreed-upon monetary ceiling (Sollish et al., 2011, p. 85). There are various forms with regards to the seller profit: the fee can be a percentage of the actual cost, a fixed fee on top of the actual cost or associated to a performance. The risk is beard by the buyer with this type of contract, which put the onus on the contract administration to mitigate the project risks. The contract administration monitoring can take the form of Key Performance Indicators that are supported by design work and technical supervision (Griffiths, 1989). The cost-reimbursable contract is however more flexible with regards to changes. As contractors are reimbursed to the actual cost, the change order doesn’t need negotiation on the cost but Time need to be agreed eventually. Last but not least, the appointment of the contractor is possible prior to a complete definition of the scope or work; the contractor can possibly participate in the project planning.
The T&M is a hybrid between the two aforementioned contracts, the total cost of the contract is not fixed at the time of agreement but the unit rates (Hours, Material) are. In this form of contract, the buyer takes responsibility of the design and hire competencies to an external organization. The contract administration is similar to cost-reimbursable contract.
In the context of software development project, for which dramatic changes can occur, the T&M contract is the preferred option for the reason that it is highly flexible with regards to changes. This contract requires meaningful supervision with regards to the deliverable quality and control of cost compared to planned expenditure (Griffiths, 1989). As an example a resource hourly rate must be controlled toward the work competency requirements: an expert shouldn’t be appointed to a coding activity and must perform as expected. In order to facilitate this supervision, it is relevant to have the T&M resources collocated with the project team.
Reference List
Sollish, F., Semanik, J., Morris, P.W.G. ed. & Pinto, J.K. ed. 2011. Planning and administering project contracts and procurement. Laureate Education, Inc., custom ed. Hoboken: John Wiley & Sons.
Griffiths, F. (1989) Project contract strategy for 1992 and beyond. International Journal of Project Management
Lori A. Floyd, L.A. (2004) Application of appropriate project controls tools for contract type. Dr Sanghera, P. (2010) PMP in depth, second edition: Project Management Professional Study Guide for the PMP exam.
[meteor_slideshow slideshow=”arp2″]
A-Research-Paper.com is committed to deliver a custom paper/essay which is 100% original and deliver it within the deadline. Place your custom order with us and experience the different; You are guaranteed; value for your money and a premium paper which meets your expectations, 24/7 customer support and communication with your writer. Order Now
Use the order calculator below and get started! Contact our live support team for any assistance or inquiry.
[order_calculator]