Economic Model to Determine the Lowest Price Limit of Fixed Price Contracts in Software Engineering

Abstract

Competition forces software producers to offer their goods and services at the lowest costs in practice (49, p. 3), (4, p. 2). In this case, software errors can lead to additional processing costs which has to be covered by the software producers themselves (20). To compensate this, software manufacturers often have the option to cross-subsidize low-priced offer prices with offers billed hourly, e.g. on the basis of service contracts. However, the relation of possibilities for cross-subsidization with the risk of software errors is not clearly predictable by the process model (52, p. 9). As this relation is defined by the process, the aim to reach cost-control and cost-transparency is strongly related to the aim of (process) improvement (51, p. 39). In order to facilitate software producers within the calculation of minimum prices, required to cover the costs, an economical prediction model will be presented in this paper. This model bases on a simulation experiment, consisting of multiple scenarios. The scenarios were derived by a variation of the risik probability and the possibility of cross-subsidization.