{"id":7829,"date":"2021-04-15T08:44:42","date_gmt":"2021-04-15T08:44:42","guid":{"rendered":"https:\/\/innotech-vn.com\/?p=7829"},"modified":"2025-03-14T16:45:16","modified_gmt":"2025-03-14T09:45:16","slug":"how-many-types-of-software-outsourcing-contract-are-there","status":"publish","type":"post","link":"https:\/\/innotech-vn.com\/vie\/how-many-types-of-software-outsourcing-contract-are-there\/","title":{"rendered":"How many types of software outsourcing contract are there?"},"content":{"rendered":"

In this article, Innotech Vietnam will show you the types of software outsourcing contract when you outsource your project to a software outsourcing company. S<\/strong>oftware outsourcing contracts<\/strong> are designed based on the different types of engagements, workflows, requirements, and client goals. Here is a quick rundown of the three most common types. Thus, understanding the difference of these contracts will help you have the right choice. Let\u2019s get started!<\/span><\/p>\n

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Target Cost Contract<\/b><\/h2>\n

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There will always be changes or deviations to projects once it starts. These carry risks for both the vendor (who wants to be paid for any additional costs) and the customer (who wants to keep costs as low as possible). A target cost contract is a great way to handle this.<\/span><\/p>\n

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In a target cost contract, both parties negotiate a \u2018target cost\u2019 for the required service. If the provider is able to deliver under the targeted budget, both the provider and the customer get to split the savings, in what is known as a \u2018gainshare\u2019. Likewise, if the contractor goes over the budget, the additional expenses are shared, in what is known as a \u2018painshare\u2019.<\/span><\/p>\n

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This type of contract aims to share the risks and rewards of the outsourced development project between the two parties involved. This is ideal for software development or IT projects in which the scope is unknown and therefore cannot be given a fixed price.<\/span><\/p>\n

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This contract also makes vendors more willing to take on complex projects that may require several change requests since they will not shoulder the full risk of cost overruns. Clients, meanwhile, are more at ease that the project will be delivered on time and within budget (and not get stuck with a half-baked project because of disputes over expenses).<\/span><\/p>\n

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Time & Materials Contract<\/b><\/h2>\n

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By contrast and in simple terms, a time & materials (T&M) contract is one where the client pays the provider for <\/span>the man-hours and materials used<\/b>. The time is paid for by taking into account the hourly rate of each team member involved in the outsourced project, while the materials can include software licenses and other related items.<\/span><\/p>\n

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This type of software outsourcing contract is ideal for when clients have a specific final objective in mind, such as to \u2018create and launch X software\u2019. It is a great option for short-term projects where the scope of work has yet to be defined in exact or step-by-step detail at its early stage.<\/span><\/p>\n

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Clients usually have to bear the risks of overruns in this setup, and they also have little control over time and budget projections. On the other hand, it is agile-oriented and does provide a lot of room for flexibility in development.<\/span><\/p>\n

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Fixed-Price Contracts<\/b><\/h2>\n

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In this arrangement, the customer and vendor agree on a fixed price for the service. The provider usually gives their price based on defined project scopes, required man-hours, and deliverables.<\/span><\/p>\n

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What makes it different from a time & materials contract is that the vendor is not required to provide a breakdown of how the budget was spent. It depends on them where to allocate the said expenses to finish the project. The rates are what they are, as long as the agreed work is completed satisfactorily.<\/span><\/p>\n

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This setup is ideal for projects where the desired features and functions of the software are clearly and exhaustively defined. If there are cost overruns, the vendor will bear the extra expenses, which gives customers a low-cost risk.<\/span><\/p>\n

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Avoiding mistakes in software outsourcing contract is key to success<\/b><\/h2>\n

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As the saying goes, you need to read the fine print before finalizing any contract. This is so you ensure everything you need is properly listed, you are not missing anything, and you avoid loopholes.<\/span><\/p>\n

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When drafting a contract for an outsourced software development project, be sure to:<\/strong><\/p>\n