How to use agile methods for the fixed price contracts

November 30, 2007 by Artem Marchenko

Agile software development methodologies discourage the use of the fixed price contracts. When forced to commit to the fixed price, agile approaches advocate unfixing the project scope. However, even if it is impossible, there are still ways to realize the benefits of agile methods.

Poorly predictable complexities

Sydney opera house, a beautiful piece of art, the Sydney's best known landmark and international symbol was started as a fixed-price, fixed-date project. Unfortunately, since it was no standard building time, it was impossible to estimate all the difficulties and complexities in advance. As a result, it took 13 years and 102 million Australian dollars to build instead of 3 year and 7 million estimated - 330% time overrun and 1350% costs overrun!

Software development is almost always to some extent a creation of something new, that nobody built previously. Therefore fixed-price and fixed-date contracts for the software development are known to be imprecise and incorrect. Nevertheless, despite the frequent and virtually normal cost and time overruns, in many IT organizations, especially in the big ones, it is often required to put a quote upfront in order to get funding secured. It is even more common in the subcontracting or offshore environment.

Agile fixes

An agile solution for such a fixed-price situation would be to unfix the schedule corner of the time-cost-quality triangle. It typically means establishing either a form of time & materials contract or gated financing. In the time & materials case the customer pays for the development month by month or iteration by iteration. Usually customer has the right to terminate the collaboration after any iteration, possibly with some premium. In the gated financing case, the product is agreed to be developed and delivered in several phases with the first phase fixed priced and the following phases fixed, when they are about to be started.

In both cases the solution has to be trust based as unfixing any time-cost-quality triangle variable naturally reduces the customers ability to force the implementor take the risks and pay for the estimation mistakes. Some clients, especially the ones working with the particular software development organization for the first time cannot agree to it. Is it still possible to apply the agile software development methods then? It is. Even though agile methods allow for the dynamic adjustment of the work scope to what the client actually needs, they also iteratively increase the efficiency of the team to the highest possible level. If you anyway have to work on a fixed price, fixed scope contract, it still makes sense to utilize the method that helps the team be most effective and as a bonus allows to see the danger of cost or schedule risks as soon as possible.

Further links

• MF Blinki: Fixed Price - Martin Fowler advocating the variable price contracts
• Agile: Fixed Price Bids - Greg Young discussing the need for bringing into the contracts the legally binding pieces without providing the explicit completion criteria
• Fixed Price Contracts - Agile Kiwi on the possibility of getting all the benefits of agility on the fixed price contracts
• The Dire Consequences of Fixed-Price IT Projects - Scott Ambler's Dr. Dobb's article criticizing the fixed-price projects effects on both the developers and the customers
• Scrum with Fixed Price Contracts - big discussion on the scrumdevelopment Yahoo! group

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