Key Pricing Constructs for Application Development and Maintenance Agreements



In all sourcing agreements, pricing provisions are a critical component of the understanding between the client and service provider and are the basis for the business arrangement between the parties.

Be sure you address these Top 5 items when crafting the financial terms and conditions for your Application Development and Maintenance agreement:

1. Clearly define the types of work in scope. Definitions for work activities associated with Application Development and Maintenance can vary depending on the industry and geography. This variance is acceptable as long as the work definitions are clearly defined in the agreement and are aligned to the pricing elements. This is extremely critical in agreements that utilize fixed price for a given scope of service.

2. Define the algorithms and methodologies for three key potential cost adjustments.

  • Inflation risk: Be sure you clearly allocate the financial responsibility for this risk between the parties and define the timing and calculation for potential adjustments based on increases or decreases of "cost of living" adjustments. The indices that are utilized in the calculation should be published by the governmental entity based on the geographies involved. 
  • Foreign exchange risk: You must clearly allocate the financial responsibility for this risk between the parties and define the timing and calculation for potential adjustment based on currency conversion fluctuations. The calculation needs to document the organization that publishes the foreign exchange indices. 
  • Taxes: It is critical to clearly allocate the financial responsibility between the parties for this cost in the agreement. The client (service recipient) should ensure that it has the right to approve or reject changes to the service provider’s delivery locations that may create negative tax implications.

3. Document committed onsite/offshore ratios for service provider delivery resources. You should note the risk associated with onsite/offshore ratios, including language specifying annual offshore ratios and language prohibiting shift by more than +/- 5 percent. This can be documented at the portfolio or subportfolio level for the term of the agreement as a personnel projection by month.

4. Maintain a process to add or delete applications to the portfolio. Be sure you provide language that will accommodate changes to the base pricing for additions and deletions to the portfolio based on level of effort, function points supported or other measures of throughput or support.

5. Document the commitment regarding the skills mix on blended labor rates. Clearly define the types and levels of skills that will be utilized in a "blended skills rate" calculation to ensure that it is not comprised of primarily junior-level resources. Document these "mix" commitments by skill type and level with language prohibiting shift by more than +/- 5 percent.

A business case that provides value for both the client and service provider is based on certainty of the cost and delivery model. Implementation of these five key constructs is a start toward ensuring that both parties can realize maximum value.

ISG’s CIO Services experts can help your company optimize its Application Development and Maintenance agreements using our experience, objective advice, industry knowledge and depth in all aspects of information technology and business process services.