Reliable customers and credible fixed-price contracts for software development projects: A study of one supplier’s contracts

Abstract

A fundamental tenet of the information systems discipline holds that changing requirements in software development projects (SDP) are the main reason for failure; therefore, in case of such uncertainties, fixed-price contracts (FPC) are not suitable for success. Our empirical research, informed by economic theories, compellingly illustrates that the FPC is an appropriate contractual form. However, we claim that there is a need to optimize its use. With this paper, we show that reliable customers allow credible FPCs enhancing project success, whereas sophisticated contract provisions do not have this effect. Customer reliability reflects whether the customer uses stable methods and regulations for information processing regarding goal definition, belief generation, and decision-making. Our findings offer managers important insights into how they can design and enact FPCs to manage SDPs successfully. Further, we show how economic theories can enhance understanding of SDP success.