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Abstract
Addressed is a case where a user contracts for the delivery of a new information system from an independent vendor, both of whom are risk-neutral. The delivery task is partitioned into 2 consecutive stages: system design and software development. The parties can contract for each stage separately or specify an initial contract that covers both stages. The impact of different contracting structures is compared on prices, project value, project completion probability, and the value to the developer of obtaining the first stage of the contract. Specifically, it is shown that a 2-stage contracting can lead to a higher business value than stage-by-stage contracting. When there is competition for the design stage, the vendors bear more of the software development risk, and the probability that the system will be completed depends on the contract structure.