Kyle Cordes

In any development project, there are well-known risks:

• Risk that the scope will be underestimated at the start increase
• Risk that the scope will increase over time (not always a bad thing
  – often a client discovers that additional functionality would deliver
  additional business value)
• Risk that the development firm will be unable to deliver
• Risk that the project will take more time than anticipated
• Risk that the project will take less time than anticipated

In a time-and-materials pricing model, the client takes most of the risk.
Many development firms (including many very good ones) only offer time-and-materials
pricing.

They do this because of the problems with the other extreme – fixed-price
contracts in which an attempt is made to fully describe the software project
in advance, then specify a fixed price to build it. In this model, the
development firm takes most of the risk, with some unfortunate side effects:

1. The development firm is strongly motivated to interpret software
   requirement as narrowly as possible, rather than in a way which maximized
   the business value of the software.
2. The development firm and its client can end up in an adversarial
   relationship.
3. Arriving at a project specification and price can be very expensive
   and time consuming, so much so that this model is often infeasible.
4. It can result in an overly conservative approach to software development,
   estimation, and design. The client might be quoted a price which covers
   the highest amount of time than anyone can imagine the project taking,
   when then becomes a self-fulfilling prophecy.

A compromise between these two extremes is referred to here as Shared-Risk
Pricing. It works like so: a basic set of core software requirement
is developed for a fixed price, then the remainer of the project is billed
on a time-and-materials basis. That core set of requirement is intended
to approximate the minimum feature set the software must have to be useful,
while encompassing the efforts needed to set up development environments,
ensure familiarity with tools, and develop the key parts of the software.