In broad terms, the use of an outside contractor for the performance of some business functions and components of business processes is defined as software outsourcing. Typically, a business chooses to hire an outside organization for performing some specific tasks because they are out of the usual business competencies, but are essential for the regular functioning of the business. Not only does it save a lot of time and effort on the part of a business, it also reduces overall cost due to which it has become a popular alternative nowadays. There are four types of software outsourcing contracts that can be availed by a business when they have decided to outsource software development.

Every contract has different conditions and the risk for the service provider and customer also varies. They are listed as follows:

Features of All Software Outsourcing Contracts

The standard information that can be found in all contracts include the approach of software development, scope of the services, deliverables, assumptions, pricing, contract duration, intellectual property and deliverable ownership, customer responsibilities, service levels, conflict resolution, responsibilities of service provider and the termination process to be followed.

Time and Materials Contract

A specific contract rate per hour or per day is agreed upon in a time and materials contract that’s charged according to the software development, which is performed by each resource of the service provider along with material costs and any other agreed costs such as network costs, travel expenses and software programs as well. Depending on the role or experience of the service provider resource, the rate charged for them may vary. For instance, a junior programmer will have a lesser rate as compared to a system architect. This type of contract is suitable in the case when it’s not possible to estimate the amount of programming that’s needed or when techniques and algorithms are needed.

Fixed Price Contracts

An agreed-upon price is paid by the customer in a fixed price contract for the entire work that’s done by the service provider. In comparison to a time and materials contract, this one is less risky for the customer as they are paying just one price regardless of the time and materials that might be used by the service provider. Penalty clauses and incentives might be included in this contract relating to software delivery times and code defects. This software is typically used when the software provider can estimate the time and materials that will be needed for the work.

Revenue Share Contracts

This type of contract is only applicable in the case when the service provider is making software product for a company that will further sell it to customers. In this scenario, the service provider will charge a reduced cost for making the software, but will demand a percentage of sales of the software product. Hence, the service provider and customer share the revenues and risk is reduced for the latter in case the product doesn’t sell. For service providers, this might be a good contract in case the product sells well.