Historically, software development acquisition contracts have varied widely in terms of how well they were designed to control costs for both the organization needing the software, and the market of bidders, one member of which who will win the contract.  Some lessons learned include the notion that poorly designed contracts can yield large cost overruns.  Well-designed contracts can provide economic incentives for much better cost control.  Since the variation in the software development acquisition contracts can be high, so this case study is not intended to be prescriptive in nature for all situations.  It is intended to show one way to view the market, how to provide economic incentives to reduce the market’s price of the software by more clearly assigning the risk of the software requirements, and how function point and SNAP software metrics can be used to improve the clarity of the understanding and size measurement of the software requirements.  With these as fundamentals, readers are encouraged to use this case study to help them with their particular situations.

In this case study, the team that needs the new software and is performing the acquisition action will be referred to as the “organization.”  This could be a company, a government agency, a non-profit organization, an educational institution, or any other type of organization.  The group of software development vendors who will be bidding on the organization’s software development contract will be referred to as “the market.”  It is assumed that all interested vendors in the market will be bidding independently of each other, there will be many of them, and they will be motivated by market and economic forces in addition to their internal management styles and competitive advantages.  It is also assumed that the entire software development effort will be managed reasonably well.

Three principle concepts will be discussed.  

•    The organization will be entering into a “relationship” with the market when the contract is offered.  This relationship can be examined, in part, using game theory.  Game theory is concerned with the actions of decision makers who are conscious that their actions affect each other. [1]   The actions of the organization – especially the manner in which it structures its software development contract – will affect how the market is economically incentivized to respond in terms of the prices offered to develop the software required.
•    The depth and clarity of the market’s understanding of the requirements at the point of potential contract award strongly influences the amount of risk the market is taking should the market accept the contract.  Risk is also a contract cost driver because as the market assumes higher levels of risk, there is an economic incentive for the market to charge higher prices (higher risk premiums). 
•    The size, or volume, of the software needed by the organization is a very important cost driver.  This amount of software needed is positively correlated to forecast software cost.  Although this is common knowledge in the industry today, one of the early research papers showing this was published in 1977 by Dr. Allan Albrecht when he introduced the first version of function points into the industry.  [2] 

This case study is based in part on the concepts presented at the 1994 Spring IFPUG conference by Ken Florian [3].  His presentation, “How to Use Function Points to Build a Contract,” provided a very informative insight into this area of software metrics applications.  It is also based in part on the knowledge and experience of the authors and contributors to this case study.

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