Contracts in Software Projects.

No new Project work can be initiated without a proper contract. A contract says, how the work will be delivered? How Billing will happen? What are the penalties of late deliverable? What are the bonuses associated with project? and so forth. It is generally accompanied with a statement of work.

Contracts are also important in selecting the Project Management methodology. In sense, if Vendor is following Agile methodology for project management, then he will try to create a contract based on the way the deliverable are scheduled. I have listed some of the contracts, and also the best project management methodology and kind of projects to work well with various contracts.

1. Fixed Cost - Fixed Scope
   Here the requirements are very well defined and articulated. So that the estimates are accurate and cost get fixed. This can only be true with waterfall kind of projects. Embedded, Desktop Applications, System Integration fall into the foray. Business Process Automation can also be done on the same principle, only if the process is mature.
2. Work based Cost
   The vendor get paid for all the work he do. The work is predefined, but cost and activity not well defined. Work well on research projects. Where the goal is defined but approach is trial.
3. Work based Cost – Fixed Scope with Cost Ceiling
   Project is also tracked on work and time basis. If vendor completes the work early or efforts required were less then estimated, the he get paid for the work he does. If the efforts required is more then estimated, then vendor has to sustain the cost. Works best for repeat projects and customization projects, where activity and skills mapping is well done beforehand. Works well with Waterfall project methodology.
4. Work based Cost with Variable Scope and Cost Ceiling
   Client is billed based on the work done. There is a upper limit on the budget, if it crosses, the work stop. Works well in Agile environment, where Client has high trust on vendors. Works well in conditions where an IT budget is chalked out well before the Product road map. All product development work can fit into this kind of a contract.
5. Phased development
   Vendor deliver and client pays.  The project is divided into phases. On completion of each phase, the deliverable are accepted by client and vendor get the payment. Since payment are done on phases. Agile methodology suits well under these conditions, where deliverable are based on sprint.

All these contracts can be edited as per the convenience of the Client and Vendors, clauses like penalty for late deliverable or bonuses for before time delivery can be added to motivate the team.

For more reference, check: Reference

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