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The fixed-price contract is generally used when the scope of the project is clearly defined. The T&M contract is generally used when the scope of the project can't be clearly defined (a customer can't provide a detailed scope of work, requirements change frequently, etc).

But what contract type do we use when a customer is able to define scope and specifications to a great extent, bot nevertheless not completely - there're still some questions that can't be answered right now, there're some potential flaws in the overall design of the product, etc.

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There are always questions that can't be answered at the start of a project. You begin with incomplete information and learn more as you go on. This is a well-known principle called the Cone of Uncertainty and it means that decisions taken at the start of a project have to be made based on information that may prove to be incomplete or inaccurate. This is especially true of software projects which almost always rely on creative problem-solving over formal specifications. In short, there is no such thing as a complete specification.

Fixed-price (FFP) contracts are extremely hard to get right for software development projects. In my experience the choice of FFP is usually right only in the exceptional cases where you have a strong, strategic relationship with a customer and/or there is a high degree of trust and understanding on both sides. FFP projects usually include an element of T&M anyway because there are invariably costs that are excluded from the original scope and those additional items are usually paid for separately at a price based on the additional effort required. The terms for those "excluded costs" may be specified in the original contract itself. That pattern seems to fit the kind of scenario you have mentioned.

T&M based contracts make more sense for both customer and service provider in most cases because T&M tends to be more cost effective, relatively risk-free and makes the most of opportunities for creative collaboration between all parties.

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    Agree that a composite contract based on Fixed Price for the known parts and T&M for the unknown parts might be the most appropriate, however it may be difficult to construct such an animal! In any case, you should (as indicated in @nvogel's answer) ensure that there is a mechanism for changes to the scope or delivery in the event of unknown matters surfacing during the life of the project, which could include scope changes, technical changes imposed by the customer, or whatever.
    – Iain9688
    Oct 8 '20 at 11:39
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A great option where cost risk is shared and where scope is largely defined is a cost plus fixed fee. In this case, both the seller and buyer are at risk for cost increases and therefore motivated to do what they can to keep costs from climbing, unlike a T&M where the seller is motivated to maximize charges. This type of contract also avoids loading up contingency the way one does for a FFP.

A good and easy to use change management process is still required, but such a process is required no matter the contract type.

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  • In cost plus fixed fee contract, are the customer's expences defined and limited at the start of a project? If not, then the customer will not consider it as a great option.
    – Daniel
    Oct 9 '20 at 9:15
  • Yes, both costs and fee are established and baselined. However, both buyer and seller share cost risk so if costs climb then the client is on the hook. Client will monitor costs and can forecast where they are headed to make timely decisions. Also, they can establish a not to exceed to help mitigate risk. Oct 9 '20 at 11:05
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A strategy that my company has used for many years is "task orders."

I was first introduced to this idea by various books on "consulting contracts" which were published by Herman Holtz (nee: "Hermann Holz ..."). He proposed that the work, going forward, should be articulated in a precisely-defined set of contractual increments, however long or short those increments might turn out to be.

I'm quick to say that this strategy has avoided a whole lot of useless lawsuits, because it carefully spells-out what the two parties agree to do next, while tacitly acknowledging that neither of them knows the future. Instead, the two parties carefully proscribe "the next move(s)."

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