- How to display the budget calculation, definition of project terms in the Agreement?
- How to present arguments for choosing the type of Agreement in front of the client?
- The details of the Agreement cannot be trivial, in this case, what should you pay attention to?
Since there are a large number of types of Agreements, it is necessary to narrow down the framework when choosing them.
Purpose of the Agreement
The customer dreams of getting the product for a fixed price, putting all the risks on the shoulders of the performer, in turn, the performer wants to extract the maximum profit with minimal risks.
Thus, the purpose of the Agreement is to find a balance between the two parties, taking into account the following criteria:
– comparison of the client’s expectations with the capabilities of the performer;
– calculation of the duration of work;
– assessment of necessary resource costs;
– preliminary calculation of the cost of the project;
– assessment of the probability of successful fulfillment of the customer’s requirements;
– discussion of possible conflicts and methods of getting out of them;
– determination of probable dependencies and assumptions.
After discussing the criteria described above, the customer can decide to develop the product or buy it ready on the market.
Types of Agreements:
- Fixed Price(FP);
- Time & Material(T&M);
- Cost Reimbursable(CR);
- Dedicated Development Center(DDC).
Let’s think about examples:
– in the absence of information on the project, Fixed Price is not suitable, but with a strictly defined budget, time and scope of work (triangle of project management) – just right;
– if you have been cooperating with the customer for a long time, you can switch to Time & Material, most likely, trust has already been built between you;
– Cost Reimbursable allows you to fix the profit rate in the Agreement itself, which makes financial calculations for the customer as transparent as possible. It is used in the case when the customer has doubts before starting cooperation;
– Fixed Price offers enough freedom in the management and allocation of resources, however, it assumes a fixed budget and, depending on the detail of the requirements, affects the marginality of the project. Instead, other types of Agreements require monthly reports of the spent hours of each programmer, while the high margin of the project is preserved in the event of deviations in the plans or changes in the assigned tasks.
As a rule, it will not be possible to conclude a Time & Material Agreement with the first customers, because the risks for them are too great, as a result, all negotiations lead to a Fixed Price Agreement. In some cases, it is possible to agree on a Fixed Price for the implementation of the MVP and subsequent Time & Material calculations.
Fixed Price Agreement
This type of Agreement is often concluded with small customers or customers with small projects. In such cases, the customer already has a prepared list of works and is ready to discuss their scope to the smallest detail.
Attention should be paid to each separate task, and also take into account what is not required to be performed according to the Agreement.
The executor is obliged to:
– develop design and architecture;
– program the product;
– release the product;
– submit the project.
The performer is not obliged to:
– support the project for free after the release;
– to fix bugs for free after the release, since the customer did not allocate funds for testing during the development of the product;
– complete new functionality free of charge after approving the list of tasks.
Various types of risks should be taken into account in Fixed Price Agreements, thus prescribing clauses with assumptions that justify the probability of an unplanned increase in the budget and, as a result, any deviations from the specified scope of work at the initiative of the customer can be resolved with the help of additional deals to the Agreement.
Time & Material Agreement
A special feature of this type of Agreement is an incomplete understanding of what the final product will be due to the difficulty of understanding the entire scope of work at the start of the project.
An excellent example can be an online store that, over time, transforms into a commercial B2B/B2C platform like aliexpress or rozetka.
In the case of the Time & Material Agreement, the composition of the team is determined, the volume of work per month is described, and payment is made according to the hours spent by specialists during the given period. What is characteristic, the size of the budget cannot exceed the limit set by the customer, thereby reducing the executor’s desire to spend money on tasks that do not bring potential benefit to the project.
What is interesting about this type of Agreement?
– compatibility with Agile methodologies;
– the possibility of integrating tests;
– flexibility in changing project goals;
– fixed salary rates for specialists;
– the possibility of adjusting the number of specialists.
The main disadvantages for the customer are the difficulty in predicting project completion dates, which can negatively affect his financial condition. Instead, the executor is forced to balance between the quality and volume of the work performed, which has a negative effect on specialists, in the sense that the tasks become uninteresting for them.
These problems may lead the customer to consider changing the Agreement type to Fixed Price.
Cost Reimbursable Agreement
Although this type is very rare in IT, and practically never in practice, it is worth paying attention to why.
The customer pays the entire amount at once, and also pays extra if the performer has overspent all the funds. It sounds like a bad joke, but the essence of the project is not known to either the customer or the executor, accordingly, all risks are assumed only by the customer, which is reflected in the manifestations of unhealthy micro-management.
If you are taking on a project that no one has done before you, the purpose of which is to find innovations and the like, Cost Reimbursable is definitely your choice.
Dedicated Development Center
According to this Agreement, the customer receives a whole team that functions as a full-fledged unit and performs only the tasks provided by the customer.
A Dedicated Development Center can be offered in the following cases:
– when establishing long-term cooperation or a number of projects from one customer;
– if necessary, maintain the current product and expand the existing functionality;
– if necessary for the rapid scaling of an existing project, when it is not possible to hire developers one by one.
Only customers with a rough wallet, professional management and successful long-term relationships are ready to sign this type of contract, since most of the risks lie on his shoulders, while at the same time he gets the maximum result.
The comparison of risks for the contractor and the customer can be depicted as follows:
Regardless of the type of Agreement, no one guarantees that the project will be set on time and meet the budget, but establishing a reference point starts with this.
At the discussions of the terms of the Agreement, you should ask all questions before signing it, and also be ready to reject unfavorable terms.