The Fixed-Price Contract: A Challenge for the Software Development Project

Describing the software development project between customer and supplier at the contracting level as interaction of the involved organizations in terms of game theory, we can show that the parties are in a dilemma situation regarding the effort for closing the gaps of incomplete requirement specifications. Incomplete, ambiguous, and changing requirements are the number one reason for failure of software development projects. Customer and supplier have to interchange information for closing requirement gaps. However, gathering and interchanging information generates undesirable costs. The most commonly used contract model is a fixed-price contract. Under this condition, the supplier is forced to cooperate, whereas the customer prefers to defect regarding closing requirement gaps. In support of our theoretical argument, we carried out an empirical investigation. We derive suggestions for improving the fixed-price contract design of software development projects as well as for the cooperation behavior during the project.