Provisions & Premiums is a remuneration model for software development contracts, which was co-developed by the author and IT entrepreneur Stefan Roock. It is designed to be "benefit-oriented", i.e.: The remuneration of the software developers (the contractor) essentially depends on the benefit that the developed software provides. This benefit can be defined in very different ways; it can be be derived from a business target (e.g. a sales target for an APP) or a metric from process controlling (e.g. time savings of X man-years or maximum throughput time for work process X). This is left up to the parties of the contract.
According to this remuneration model, the contractor receives a premium if the defined benefit is achieved. At the same time, the contractor receives a low daily rate as basic compensation, which, however, covers costs and doesn't include a profit margin. The objective of this contract design is obvious: It is about the incentive for a close, partnership-based cooperation and to give the contractor a strong incentive to familiarize himself with the business model or processes of the client.
In practice, the contracts must be designed in such a way that the contractor's risk of missing the premium is at the same time counterbalanced by the opportunity to achieve the premium and thus generate a profit above the usual market profit margin. Provisions & premiums combined are therefore higher than would be the case with a purely fixed price.
