Software development is not easy for startups. With a PowerPoint presentation and a few arguments that convince your friends, you can’t achieve the precision and refinement in thinking that a fixed price contract needs. An umbrella Time and Material contract with modules in fixed pricing can work for you.

It is our nature that we will not be able to get to the finest level of detail for a big application. Generally, entrepreneurs have a vague idea. Their thinking evolves–you add modules, change them and scrap others. But if you signed a fixed price contract, you can’t go back and change it every time you change your requirements. The moot question will then be who will bear the additional cost –the software services vendor or the entrepreneur? This lands the project in trouble.

To avoid this, I recommend that you sign an umbrella Time and Material (per hour or per person month) contract and sign a fixed price for each module. Though it is not possible for you to document an entire application, you can think through and document the details for each module (size of about a tenth of an application). Then sign a fixed price bid for each module. Not only will the service providers be willing to sign a fixed price because they know – because they have it written-what they are getting into. If you sign fixed price, effort over runs for smaller modules will be borne by the vendor and not you.

This framework is more attuned to your nature, gives you more time to pen down the requirements and is more likely to be successful.

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2 Responses to Why It Makes No Sense for Startups to Outsource Software in Fixed-Price Contract

  1. Hi Chaitanya,

    Nice and clean blog :-)

    From the point of view of a start-up, it only makes sense to go for a Fixed Priced model if they have clarity on the business logic of the development. If the business logic is still in the process of being figured out, then it would make more sense to do a thorough scenario analysis. But often for startups, the exact specifics remain to be chalked out and thus the requirements can never be completely frozen.

    If the scenario analysis is not feasible, then a T&M approach would be much more beneficial. The only problem from the view of a start-up is that there is a risk if the solution vendor asks for/takes up more time than actually required.

    A more hybrid model would be going the Agile way, wherein, the customer and the developers meet over and clarify the exact requirements. This not only increases the interactions of the developer and the client, but also gives the client multiple opportunities to foresee delays in deadlines and means to correct the deliverables if need be. Then we can even go ahead with module-wise payments as you have suggested.

  2. Chaitanya says:

    Thanks Prasad for your kind words. The hybrid model, as you called it, is suitable for startups.

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