Turning fixed price contracts into a win-win situation

Continuing our three part series about contracts and agile software development, here is part 2 about how to handle the fixed price environment that most of us work in today:

If you are an agile development organization, but you do actually have to submit a bid for a fixed price, fixed scope contract anyway, there is no way around adding an ugly up front requirements phase in front of your shiny agile process.

Doing this you can use the same estimating techniques here for an agile project as if you were doing a traditional project. E.g. check out Steve McConnel’s “Software Estimation, Demystifying the Black Art” for some good coverage of this.

But even if you are forced to add a traditional requirements phase (and thus waste a lot of money since on average you will be spending 64% of that time analyzing features of no value to the customer), you can still get significant benefits from using agile development:

  • An agile team will have higher productivity than industry average. You will be able to complete the project in half the time and have a nice profit.
  • An agile team is skilled in estimating since they work with estimates every day. They will also know their historic velocity. This gives you a better position to bid from.
  • In a high risk situation you can select to do what a really big and successful telecom supplier does. Before bidding they run 3 iterations on each big new project, taking the cost themselves. After this they have a measure of the velocity of the teams involved and can make bid with high confidence.
  • When you are awarded the contract, you can offer the customer to add an optional, risk free, agile clause to the contract. This clause is sometimes called “Money for nothing, change for free”. The clause will invite the customer to cooperate in an agile manner, making changes at no cost as they see fit as long as the total work is not changed. It will also allow the customer to stop the development whenever they want, paying a fee of 20% of remaining work as compensation for loss of opportunity. Usually 80% of the value of a system comes out of 20% of the features. So, when the customer has received 80% of the value, it can stop the development and not waste anymore time and money on developing low value features. The customer will pay 20% + a termination fee of 20%*80% = 36% of the initially agreed cost and will have the project delivered early. If the supplier was counting on a 15% profit for the time spent, it will instead get a 95% profit counting the termination fee also. And so the evil fixed price contract has been transformed into a win-win situation!

Once the customer has experienced the ease and power of being an agile customer, it is likely that they do not want to work in any other way again. Probably this means that there will be more business coming your way also. Also, the next time you work with a customer like this, there will be trust between the companies and you may not have to bother with the up front requirements waste and the fixed price contract.

In the next and final part in this series we will cover other types of contract that has been successfully used to encourage more productive cooperation between companies.

– Henrik

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