Agile Contract Models
Using the agile software development process in conjunction
with client contracting is challenging due to the emergent nature of the
detailed plan and product. Traditional contracts, used to bid or scope an agile
development effort can subvert project execution and causes both parties miss
the potential benefits of agile development since a full understanding of the
client needs is assumed in a contract.
Fortunately others have come before us who have tried
different contracting models.
Some of the typical models of contracts are listed in the
following table:
Contract Name
|
Description
|
Capped T&M
|
Use time and material but cap the cost based on effort or
scope. Sets up a conflict with the
customer as this model assumes all scope is known.
|
Fixed Bid
|
Price and scope is fixed.
Quality is the only variable – which is not good. Assumes all scope is known.
|
Target Cost
|
Mutually target a cost, if final
product cost is less, split the savings.
If final product cost exceeds target, share the extra cost. Can be a tough sell and setting the target
cost is a challenge.
|
Target ROI
|
Estimate work for effort and value to determine each
piece’s ROI. When the summation of
effort and value for a sprint reaches a certain ROI, enter a ‘work wrap up’
sprint and end the project.
|
Contract by story point
|
Work is broken down into small stories
and estimated by story points. Fixed
bid work is based on number of story points.
As the project progresses, scope is fixed but stories can be exchanged
as long as they are not currently in a sprint.
|
Money for Nothing
Changes For Free
|
This is a combination of target ROI and contract by story
point. The work is targeted toward a
certain ROI and stories of the same size can be exchanged as long as they
haven’t started yet.
|
Contract by Sprint
|
Each sprint is a mini
project. Could be contract by several
sprints. Client can cancel after any given sprint.
|
* A
good blog on agile contracts from another scrum.org coach:
The best contracts for agile use a variable scope and shared
risk approach. Of those, Target ROI,
Contract by Story Point, and Money for Nothing Changes for Free are the most
popular and effective. Here’s a description
of each.
Target ROI
Target ROI works when customers want fixed price estimates
for the entire contract up front but the work has not been fully . The Agile contract allows termination of the
contract when the value of features drops below a certain ROI criteria. It can be effective for delivering high value
to the customer for a reasonable price and building trust. The ROI value can be based on revenue or
using other techniques.
Contract by Story
Point
Contract by story point works can well when the client wants
a fixed bid based on work that isn’t very solidly defined or is emergent. The estimates determined based on high level story
points and, as work is broken down, stories of the same size can be substituted
as long as they are not within a sprint.
This technique works well when the client doesn’t know what they want or
there is a large risk of discovery. It
can be risky though for both parties considering team velocity comes into play
when billing the project. Also story
points can become a sticking point in client-provider relationships when the
provider re-estimates detailed stories.
Money for nothing,
changes for free
“Money for nothing, changes for free” can be though of as combination
of Target ROI, Contract by Story Points, and Target Cost. The following elements of each are combined:
·
Contract by Story Points - the estimates
determined based on high level story points and, as work is broken down,
stories of the same size can be substituted as long as they are not within a
sprint.
·
Target ROI - Delivery is based on a target ROI,
and project payment is based on a mutual price
·
Target Cost - Mutually determine target a cost
for a certain ROI, if the ROI is reached and the final product cost is less,
split the savings. If ROI is reached and
the final product cost exceeds target, share the extra cost.
This is a complicated contract but the risk is shared, the
delivered product is malleable, and success is based on what really matters –
value. If the business value is not realized on a particular cost target, then
there should be a fall-back to time & material.
“Money for nothing,
changes for free” contract turns the advantages of the agile development
processes into a competitive advantage by prioritizing and delivering business
value incrementally and allowing change when something is learned.
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