You have suggested cost reimbursable contracts and specifically CPIF as the best suited to outsourced software development project in which the specifications and requirements may change drastically throughout the project life cycle. However, In a CPIF the buyer and the seller agree to share the risks associated with the project execution. Accordingly, both parties negotiated and agreed on target cost and target profit.
Any variance among the actual cost and target cost will be shared between the parties based upon a pre-negotiated cost-sharing ratio (e.g. 70/30).
At the end of the day, the seller acquires the target fee plus or minus predetermined share in cost deviation. Even so, the following show the mathematical formula to identify the seller's new fee: F(x)= C+ ?(X0-X) Where: F(x) = the seller's new fee (profit) X0 = the target cost; X = the actual cost; C = the target profit; ? = the contractor's sharing fraction, 0 < ? < 1
Now, based on your experience and readings so far explain how a buyer and a seller would arrive at a suitable cost-sharing ratio in CPIF contract? your thoughts? - Project Management Institute (2013) A guide to the project management body of knowledge. 5th ed. Newton Square, PA: Project Management Institute.