Pricing and Contract Design for Software Products in the Presence of Requirements Change

The presence of software requirements change (RC) during project development is a critical challenge for the developer to offer software contract designs. Because under the presence of RC, the decisions toward the contract offer will impact to project's price spent by the developer. Managers of software companies must decide what contract designs to offer to clients in the development of software. Abstracting from an example drawn from the software industry, we exhibit three designs of software contracts incorporating fixed price (FP) and time-and-materials (T&M) policies. Specifically, a software company offers a fixed-price and agree to RC with adjustment cost (SW contract), or initially provides a fixed price and then charges an additional fee based on the time-and-material in response to RC (MP contract). We examine the strategic choices of two contract designs in a two-stage game. We carry out a full analysis of distinct settings of monopoly model. We characterize the conditions under which the contracts can be the best decision for developers. As the result, we found that the MP contract performed better when accommodating the presence of RC instead of the SW contract.