The Hidden Tax of Hourly Software Development — And Why AI Just Made It Unacceptable
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AI-driven productivity gains have exposed a structural flaw in time-and-materials (T&M) software contracts: vendors have no incentive to pass efficiency savings to buyers. When AI tools cut developer effort by 30–50%, the vendor captures the margin improvement rather than reducing prices. Outcome-based, fixed-price contracts realign incentives by making delivery speed directly profitable for vendors, forcing rigorous scope definition, observable milestones, and governance systems. The author cites their own company's methodology (Ailoitte AI Velocity Pods) as delivering products in a median of 38 days vs. an industry average of 120 days. Buyers are advised to ask vendors directly whether AI-driven efficiency reductions would lower their price — the answer reveals the contract structure immediately.
