There are drawbacks to T&M contracts that may lead to higher project costs. A quoted time and materials contract ensures clients only pay for the actual work done.
Outsourcing software development—contract types
Two contract models are common in the IT industry for software outsourcing: a time and materials (T&M) contract, and a fixed-price contract.
A T&M contract specifies a fee for the software development services according to the hours worked as reported by the software developers. The client also pays for materials such as software licenses.
A fixed-price contract sets an amount that a client and a software developer agree for delivering an entire project (for example, a working solution). It requires a carefully specified, nearly unchangeable project scope and deadline. Alternatively, the client and the outsourcing company may agree on an amount for each deliverable.
Since paying for the working hours of the outsourced software development team is fairly straightforward, the T&M contract is much easier to set up than a fixed-price contract. That makes the T&M contract the most popular type.
When your software development team does not perform well
The relative simplicity of a T&M contract may not always be sufficient, however. No matter what outsourcing model you choose (staff augmentation, dedicated team, or hybrid team), your outsourced software development team’s performance may not be optimal. This may even occur when your hybrid team consists of developers from your outsourcing partner plus management from your own staff.
One of the main causes of a team’s low performance may be a poorly prepared project backlog featuring unrealistic estimations for the project’s tasks. Likewise, if the backlog has too few tasks, or the tasks are not very important, the software development team will be idle or doing work that does not add any value.
The remedy: a quoted time and materials contract
These problems can be prevented by choosing a quoted time and materials contract (QT&M) for your software development projects. You pay for the work completed by the team rather than for the time spent working. This incentivizes project managers to set up clear priorities carefully and to focus on developing product features that bring real business value. The project team can proceed with confidence, understanding that their contributions will be meaningful and result in considerable business influence.
Assigning a business analyst or system analyst to the project team who will assist a product owner and other team members in creating the project backlog will help ensure the best result. The analyst can help the team consider the business impact of the various tasks.
If the responsibilities for your software development project are clearly delineated and you are confident that your team will solely focus on worthwhile tasks, a QT&M contract could be appropriate. Ultimately, your expenditures will be limited to software that has been successfully delivered.
Other processes and legal matters should be specified in a good IT outsourcing contract, particularly when working with an offshore software development company. The focus in this post is on choosing the right contract model to avoid financial burnout when outsourcing software development projects.
How a quoted time and materials contract works
In a QT&M contract, the main payment unit may be one developer’s work-time period, that of the project team as a whole, or a sprint. The software development team agrees to deliver a certain number of software features with each sprint.
As a result, it is very important that a project owner clearly understands how the team allocates time for the backlog items when planning. The allocation method should not change from sprint to sprint.
If the resources required for a backlog task are revised during the sprint, this needs to be justified and approved by the product owner.
A backlog item is deemed complete when it satisfies the acceptance criteria. Consequently, the total payment for the services rendered by the software development team could be less if the team produces fewer functionalities that meet these criteria. This procedure serves as a buffer to shield your budget in case of subpar team performance.
In this arrangement, it is your outsourcing partner that takes the responsibility for the quality of the software delivered, the efficiency of the work, any interruptions to the work, or a shortage in skilled staff.
How much does it cost to outsource software development—a wrap-up
As you can see, a quoted time and materials contract addresses the shortcomings of the most commonly used time and materials contract and is a beneficial solution for the clients of software development outsourcing companies. They can be sure that they will only pay for the services that meet their standards. This significantly reduces the risk of uncontrolled spending and enables effective project management.