New Frontier of Agile Contracting

I blogged about how I always shy away from fixed-price contract. As a result, I pass up opportunities where clients are not comfortable working on a T&M basis. So, I have been looking for ways to accommodate clients concerned (apprehension about not knowing the total costs) about T&M and find a happy median. I was happy to learn at the Agile 2008 conference about a few approaches that some companies are trying. I thought others might be interested to learn about these novel approaches to contracting.

Money for Nothing and Change for Free. This is the most intriguing of all the variations I heard about. Jeff Sutherland, co-creator of Scrum, shared this interesting case study of a company that was contracted by a client to do a large project. The RFP was awarded based on waterfall approach. The company estimated the project to take 18 months and would cost $1.8MM. Essentially, the project was awarded as a fixed-bid contract. However, they negotiated with the client that they will do the project using Scrum. And they added an innovative clause to the contract that said if they delivered 80% of the intended value from the project, the client would have the option to end the contract and would pay the company (the vendor) 20% of the remaining contract value. Guess what happened? The company was able to deliver 80% of the value in 3 months into the project and the client was happy to pay 20% of the rest of the contract value. Both parties were delighted. Pretty neat, hah! So, to generalize this approach, we could bid for projects in the traditional way (i.e., fixed-bid), but add the following clauses,

• Client can change requirements for free ("change for free"). Traditionally any change to requirements results into repricing that usually causes the project costs to go up.


• Early delivery results into a bonus for the vendor which is equal to 20% of the remaining contract value. This is what is called "money for fee."

Hybrid Contract- T&M Definition Phase, Fixed-price Delivery Phase. Essentially vendor will work with the client to on a time and material basis to build the product backlog (requirements) and produce a high level estimates and validate assumptions. Once both parties are comfortable with the definition of the project, the project enters into a fixed-price delivery phase. This will work when the product backlog can be defined reasonably well in a reasonable time-frame as well as the the development team is experienced in the domain and technology and that the development team knows its velocity.

Hybrid Contract- T&M Delivery of Phase 1, Fixed-price Delivery of Subsequent Phases. With this approach, the project is broken into multiple phases. The first phase is done on T&M basis with CAP maybe. In this phase, both the client and the vendor collaborate to identify and address domain as well as technical unknowns. By the end of the T&M phase, the project is expected to have set on a predictable course so that the vendor can price out the rest of the project with reasonable confidence.

Fixed-rate per Unit of Work Contract. This approach requires the vendor to have a stable team that has a well established velocity and also familiar with the technology and domain. The contract is awarded based on an expected rate of work produced per iteration at a fixed cost. The unit of work can be in story points or function points. This would be the nirvana of agile contracting. This could transform software development service into a "Service on Demand."

There are variations within each of these contract framework. I would be interested to hear from others on this topic. Drop me a few lines.