#8 Fixed Price Contracts and Agile Project Management

A classic way to fail at outsourcing is not so obvious to the client or the vendor, and that is to attempt to fix the price, scope, and time line for a sizable engagement. Yes, fixed bid engagements ARE risky to the client!

The client believes that they are limiting the risk of cost and time overruns by getting a vendor to accept a contract with a specified price, scope, and time line. What they do not recognize is that CHANGE is INEVITABLE. Ultimately as the project progresses clarifications will be made to the requirements. Some will result in additional scope and effort beyond the original contract. To then engage in submitting change orders is standard procedure. However, the effort to identify the change and the subsequent negotiations to accept or reject the change can ultimately bog down the team and cause friction between the internal and vendor teams.

If you recall the last 20-30 years of software development with Waterfall lifecycles, a great deal of effort was put into identifying and documenting all the possible requirements. Sometimes, Business Analyst teams would spend 6-9 months documenting every last detail. Then, they would pass the requirements to various vendors for a bid. Eventually the client would choose a vendor that seemed to understand, had the most relevant experience, and would be willing to drop its price to match the lowest bidder, even if the lowest bidder was eliminated for other reasons.

Typically, at this early stage of software product understanding, the 2 parties would come to a contractual agreement, fixed price, fixed (perceived) scope, and fixed deadlines for finishing. The process for dealing with change, if dealt with at all, was identified as a change order process.

And the results are in on this style of contractual and project management.

70% of software development projects FAILED.

This is part of the reasons why Agile project management came into being.


So, particularly with Software-as-a-Service (SaaS) product development where early feedback from customers and investors is critical, smaller, adjustable scope engagements are much more appropriate.

Most companies that would consider outsourcing have a hard time trusting their new potential partners, probably with good reason.

So how do you create the right contractual agreement to match a flexible project management style?

The answer appears to be a little bit of everything. Allow for a fixed bid starter engagement that allows the foundations of the relationship to be set. 4-6 weeks seems about right, but it will probably depend on the size and duration of typical engagements in your field. Then, as both parties are comfortable with each other, a flexible scope, target cost agreement can be worked out. Imagine here a dedicated Agile development team with a fixed monthly cost and some performance objectives.

The following resources are very helpful for understanding the conflict between fixed bid and Agile project management.

Selling Agile: Target-Cost Contracts
How To Sell Agile To Fixed Bid Contract Clients
Agile Contracts - Lean Software Development

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