This article will assess the numerous models of billing and engagement for the offshore development team services currently active in the industry. It’s quite fascinating to learn that such models have been molded from the manufacturing industry, and the integration seems to be very successful. Offshore development team models of engagement are severely important as the outsourcing contract’s life cycle is contingent on them. As such, it’s vital that the proper billing model is used to enforce correct risk mitigation. In doing so, confidence in the IT outsourcing company remains intact.
T&M (Time and Materials) and the Not-to-Exceed T&M Clause
The average time-and-materials approaches of productivity, as per specific expenditures. This is generally tracked through weekly progress reports and timesheets provided by the offshore development team. From the customer’s point of view, you obtain only what you require and pay for just that.
Time and materials tasks tend to work out with a positive outcome when there are variables involved with a project. Because there is no complete certainty here, a time and materials job that lacks expense regulation is a problem waiting to happen. A not-to-exceed clause (costs won’t surpass a specific figure) should be integrated to regulate the job’s expenses. It’s very important that all factors of the software development project are kept in mind and a scope is maintained for incidentals.
There are various advantages for the customer brought upon by the Time and Material model of engagement:
- Total transparency
- Upfront costs
- Zero hidden agendas
- Reinforcement of offshore development team service provider’s ability to provide adaptable teams and engagements
Fixed-price Outsourcing Project
The project is achieved based on a fixed time and billing plan. Offshore development team engagement might be based on a hard set of specifications, or accommodate specific levels of adaptability. A firm-fixed-price contract offers a rate that isn’t subject to modifications as per the provider’s cost experience in getting the job done. This type of engagement puts responsibility and risk for all expenses (as well as the loss or profit it produces) on the provider of the offshore development team. It offers a complete incentive for the provider to regulate expenses and effectively perform while imposing a minimum administrative burden on the customers.
Milestone-Based Schedule of Payment
In a remote development project, schedules of payment that are milestone-based reinforce progress tracking and the evolution of milestones that are achievable and firm. In the end, the measurable and achievable output is delivered. Milestone-based payment is beneficial if payment is justified, and risks are reduced by visible progress. This offshore development team model of engagement is ideal for clients worried about sensitive project schedules. With this offshore development team model of engagement, the main point is to pay for results instead of time. Check out the following example that shows the use of payments that are milestone bound:
Upon execution, a $20,000 advance will be paid to the custom software development company for this contract. Afterward, they’ll receive $30,000 for successful completion of the six-month milestones, and another $50,000 for the twelve-month milestones, completing the outsourcing plan drafting. During this time, it is agreed that the contract can be terminated by either party upon submitting a written statement on why the party thinks the implemented plan won’t move ahead or result in the desired outcome.
While the plan is being implemented, another $50,000 will be paid at 18 months, and one more 24 months after completion of a successful milestone. After a couple of years post-contractor completion, the contractor will receive another 50% success fee based on all net revenue over $50,000 (to a maximum of $25,000).
Resource-Based Monthly Payment
Ideally scheduled for the extended Offshore Development Team model, billing is conducted monthly according to the amount and level of resources used. In outsourcing parlance, this might be comprised of the amount of agents or operators necessary for a monthly fixed price per resource.
The customer is at the advantage as there’s a flexibility to change the project details and specifications when required. Billing is done on an hourly or monthly basis based on the timelines, resources, team size and other specifics.
This is the first article in the series dedicated to offshore development team pricing models. If you’d like to learn even more about this topic you’ll enjoy reading our blog post “Things You Should Know About Offshore Development Center Model“
Feel free to comment on this article, and share your thoughts about models. Get in touch with us if you need assistance selecting models of engagement and billing suitable for your project or visit our Dedicated Development Team Service page to learn more.