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A list of proven examples of your previous work might be helpful here. Also, the contract can be made to ensure that complete payment will be upon satisfactory delivery. Something like a staged payment.

Use Ruby on Rails as the development framework. It follows strict conventions to make sure that the quality of code produced is of high quality. Its easier to follow the best practice than not to do it. For example its easier to write unit tests than not to. Most reusable code in rails is available as plugins and and security is taken care of by the community. Its always better to use maintained code from the community, than not to. Rails and subversion make this easier by allowing code in a project to be tied to code developed by the community automatically.

If spec documentation created automatically, that would be the best scenario, right? The project starts of by coming up with initial screens iteratively. Only the most necessary features go in there. The application is deployed to a staging server daily. Once the initial application is built, no more screens. Tasks are raised in Basecamp/Trac and are integrated into the application. Development documentation is written inside the code itself and RDoc is used to create the documentation and diagrams from the code automatically. In all, only work that absolutely adds value to the application is performed. Also, its always better to make the application usable than to create user documentation.

The project manager in the US should take care of the communication and cultural issues between the developers in India and the users in the US.

Use a framework that deploys code on amazons EC2 and takes care of the scalability issue. EC2 is an affordable service that amazon provides, which can deploy servers in minutes when the load on the server increases. The share nothing architecture of Rails makes scaling a lot easier.