I would second this advice of staying away from #2. We tried option #2, but it required a lot of handholding. Not to mention the risk of contractors doing the minimum amount of work to meet requirements. Also, after the contract ended, we were left with nobody in our team with enough knowledge of the code to modify it quickly. The process of reading and learning the code (and to merge it into your own thought process) can take as long as writing the code itself.