Week 7_Gopal et al.(2003)_Xue Guo

Contracts in Offshore Software Development: An Empirical Analysis

This paper is motivated by the tremendous growth of the offshore software development and the need to increase viability and profitability of vendor-client relationships. It empirically studies the determinants of contract choice in offshore software development projects and examines the factors that affect the project profits accruing to the software vendor.

The paper examines the adoption of the two prevalent forms of contracting in the software industry—fixed-price contract and time-and-materials contracts. The main risk will be borne by the vendor under a fixed-price contract, and the client under a time-and-material contract. Based on prior theories in contract, this paper presents four possible factors that may affect contract choice: software development risks, client knowledge set, bargaining power and market conditions. Empirically, most of the variables adopt measures from previous literature. In order to assess the reliability of the measurements, the paper uses multiple questionnaire items for one variable. The results show that project-related characteristics such as requirements uncertainty, project team size, and resources shortage significantly explain the contract choice in these cases.

Then the paper studies the efficiency of the contract by examining the effect of the information known during contracting on project profits and add three development factors to improve the fit of the regression analysis. The corresponding results show that vendor does make higher profits from time-and-materials contracts when control for other characteristics of the projects.

The contributions of the paper are that it empirically tests the determinants of contract choice in software industry and addresses the linkage between contract choice and project profits. However, the paper’s limitations are the restricted data set and measurement problem of some variable.