Contracts are an essential part of everyday life, even more so when it comes to our professional interactions. Now one would assume that the more favorable the terms are to you, the better off you are. However, what if that is not the case? The authors look at two very similar types of contracts for outsourced software development work. Both require that any project overrun be jointly funded by the client and the vendor, but one places an upper limit beyond which the vendor becomes wholly responsible for all costs. This limit clause seems reasonable from a client point of view, to protect them against an oversized project overrun.

The hypothesis is that once the budget approaches the limit set on risk sharing, the vendor is incentivized toward behavior that is no longer in the best interests of the client. The risk of financial ruin will motivate the vendor to focus more on matching the requirements specification than on client satisfaction. This behavior will in turn create an increased demand for oversight and project administration effort from the client’s employees.

The authors base their analysis on questionnaires, completed by 24 software professionals with experience in both variants of the risk-sharing contract form, which indicate that placing a limit on the risk sharing does reduce the probability of the project being considered a success. The authors try to address the many possible alternative sources of the causality, so my main criticism would be the very small and geographically concentrated sample size.