Agile project management and fixed-price contracts - challenges and solutions
Originally developed in the field of software development, Agile methodologies have gained popularity across various industries, enabling efficient and effective management of complex and dynamic projects.
Agile is a methodological approach that emphasises flexibility, collaboration, and incremental delivery of results. This contrasts with a traditional Waterfall approach, which involves distinct and sequential phases of planning, development, and testing. Instead, Agile promotes working in multidisciplinary teams, continuous collaboration with customers, and incremental delivery of useful functionality. This approach allows organisations to swiftly adapt to changing requirements and promptly respond to customer needs.
The Agile project management frameworks have become so popular partly due to the fast-paced nature of business today. With its focus on continuous evolution and collaboration, Agile project management targets organisations dealing with rapid to-market deadlines, shifting priorities, high stakeholder engagement, and a need for flexibility – in short, most businesses today!
Contracting challenges
Agile works through short development cycles called “sprints”, while the requirements are flexible, and they might change as the project progresses. This continual process of review and change makes it fundamentally different than the traditional Waterfall project, which proceeds in a comparatively straight line, with clear sequencing, milestones and pre-defined delivery outcomes.
From a contracting perspective, this approach can present a number of challenges.
For instance, in a traditional Time & Materials contract, the supplier may be incentivised to sell additional time, leaving the customer vulnerable to poor quality or underperformance. Conversely, in a Fixed-Price contract, the focus on initially defined outcomes can restrict the customer’s flexibility to later modify requirements during each sprint.
So what is the solution if you want to combine the prospect of financial stability brought by a fixed-price contract with the need to be able to quickly respond to changes?
One solution can be a hybrid approach, where instead of negotiating a fixed price for the whole contract, you agree on a fixed price per Sprint or per Story Point. This maintains flexibility, as the scope and outputs don’t need to be defined in detail from the beginning, and they can be adjusted and re-prioritised in each Sprint, while the payments remain proportional to the volume and complexity of the work delivered.
The other option, in the case of a pure Fixed-Rice contract, is to replace one of the the traditional three fixed components of the project (scope, time and cost), with a new one: the size of the project, measured in story points. Having a fixed Size means that the Scope can become flexible, and you can trade low priority requirements from the initial backlog for higher priority new requirements identified during the sprints. As long as the size value of the new requirements is the same as the size of the traded ones, the project remains on track and you can quickly respond to any change.
A popular prioritisation technique used for managing requirements in a project is the MoSCoW method. The MoSCoW method helps teams prioritise tasks during the development process by categorising initiatives into four categories: must-have, should-have, could-have, and won’t-have.
To run a MoSCoW analysis and to create a sensible pool of Could Have contingency – typically around 20% of the total project/increment effort - key stakeholders and the product team need to agree on the objectives and prioritisation factors, especially in the case of a fixed Size of the project. It is also important to reach a consensus on how to resolve disputes and allocate resources to each category.
In any case, the success of an Agile project will also depend on these vital factors:
Leadership support: The key stakeholders and the management need to actively champion the project and the Agile framework.
Collaborative approach: The product owners and the delivery teams need to be brought together from the onset and need to be involved in each sprint, sharing the delivery responsibilities and accountabilities with the supplier.
Defined clear quality standards: The contract should be clear on quality standards and thresholds, and describe the interactions that will take place between the different teams and the supplier.
Trained and motivated individuals: Build your project around people well trained in the Agile methodology, motivate them, give them the environment and support they need, and trust them to get the job done.
Shared ownership: It is crucial for all teams to share the same sense of urgency and ownership for the project. A key tactic to achieve this is to define frequent milestones and allocate ownership of each milestone to different teams. Periodic status updates for each team and tracking the dependencies are vital to identify common challenges or potential delays across teams, ensuring timely completion of tasks and early joint solutions.
Conclusion
Agile frameworks have proven to be a powerful approach for organisations looking to thrive in today’s dynamic business environment, while a fixed-price contract shares the risk between customer and supplier, offering commercial protection. By embracing flexibility, collaboration, and iterative progress, projects can thrive even in this scenario.
The key is a constant involvement of the product owners and stakeholders, incorporating the Agile methodologies at all stages, and aligning the supplier team with the customer vision from the get-go.