Contracting in Agile – You try it

One of the key principles in Agile development is

“Customer collaboration over contract negotiation”

Unfortunately, that means that if you’re trying to follow Agile methods, you’re left without useful guidelines to follow when it comes to contracting and coming up with contracts that fit the way that Agile teams work.

Time-and-materials of course is a no-brainer, regardless of how the team works – do the work, track the time and other costs, and charge the customer as you do it. But it’s especially challenging for people who have to work within contract structures such as fixed price / fixed scope, which is the way that many government contracts are awarded and the way that a number of large businesses still contract development work.

The advice for Agile teams usually runs something like: it’s up to you to convince the purchaser to change the rules and accept a fuzzier, more balanced way of contracting, with more give-and-take. Something that fits the basic assumptions of Agile development: that costs (mostly the people on the team) and schedule can be fixed, but the scope needs to be flexible and worked out as the project goes on.

But in many business situations the people paying for the work aren’t interested in changing how they think and plan – it’s their money and they want what they want when they want it. They are calling the shots. If you don’t comply with the terms of the bidding process, you don’t get the opportunity to work with the customer at all. And the people paying you (your management) also need to know how much it is going to cost and when it is going to be done and what the risks are so they know if they can afford to take the project on. This puts the developers in a difficult (maybe impossible) situation.

Money for Nothing and Change for Free

Jeff Sutherland, one of the creators of Scrum, proposes a contract structure called “Money for Nothing and your Change for Free”. The development team delivers software incrementally – if they are following Scrum properly, they should start with the work that is most important to the customer first, and deliver what the customer needs the most as early as possible. The customer can terminate the contract at any point (because they’ve already got what they really need), and pay some percentage of the remainder of the contract to compensate the developer for losing the revenue that they planned to get for completing the entire project. So obviously, the payment schedule for the contract can’t be weighted towards the end of the project (no large payments on “final acceptance” since it may never happen). That’s the “money for nothing” part.

“Change for free” means that the customer can’t add scope to the project, but can make changes as long as they substitute work still to be done in the backlog with work that is the same size or smaller. So new work can come up, the customer can change their mind, but the overall size of the project remains the same, which means that the team should still be able to deliver the project by the scheduled end date.

To do this you have to define, understand and size all of the work that needs to be done upfront – which doesn’t fit well with the iterative, incremental way that Agile teams work. And it ignores the fact that changes still carry a price: the developers have to throw away the time that they spent upfront understanding what needed to be done enough to estimate it and the work that they went in to planning it, and they have to do more work to review and understand the change, estimate it and replan. Change is cheap in Agile development, but it’s not free. If the customer needs to make a handful of changes, the cost isn’t great. But it can become a real drag to delivery and add significant cost if a customer does this dozens or hundreds of times over a project.

Fixed Price and Fixed Everything Contracts

Fixed Price contracts, and especially what Alistair Cockburn calls Fixed-Everything contracts (fixed-price, fixed-scope and fixed-time too) are a nasty fact of business. Cockburn says that these contracts are usually created out of lack of trust – the people paying for the system to be developed don’t trust the people building the software to do what they need, and try to push the risk onto the development team. Even if people started out trusting each other, these contracts often create an environment where trust breaks down – the customer doesn’t trust the developers, the developers hide things from the customer, and the people who are paying the developers don’t trust anybody.

But it’s still a common way to contract work because for many customers it is easier for them to plan around and it makes sense for organizations that think of software development projects as engineering projects and that want to treat software engineering projects the same way as they do building a road or a bridge. This is what we told you we want, this is when we need it, that’s how much you said it was going to cost (including your risk and profit margin), we agree that’s what we’re willing to pay, now go build it and we’ll pay you when you get it done.

Cockburn does talk about a case where a team was successful in changing a fixed-everything contract into a time-and-materials contract over time, by working closely with the customer and proving that they could give the customer what they needed. After each delivery, the team would meet with the customer and discuss whether to continue with the contract as written or work on something that customer really needed instead, renegotiating the contract as they went on. I’ve seen this happen, but it’s rare, unless both companies do a lot of work together and the stakes of failure on a project are low.

Ken Schwaber admits that fixed price contracting can’t be done with Scrum projects (read the book). Again, the solution is to convince the customer to accept and pay for work in an incremental, iterative way.

Martin Fowler says that you can’t deliver a fixed price, fixed time and fixed scope contract without detailed, stable and accurate requirements – which he believes can’t be done. His solution is to fix the price and time, and then work with the customer to deliver what you can by the agreed end date, and hope that this will be enough.

The most useful reference I’ve found on contracting in Agile projects is the freely-available Agile Contracts Primer from Practices for Scaling Lean and Agile Development, by Arbogast, Larman And Vodde.

Their advice: avoid fixed-priced, fixed-scope (FPFS) contracts, because they are a lose-lose for both customer and supplier. The customer is less likely to get what they need because the supplier will at some point panic over delivery and be forced to cut quality; and if the supplier is able to deliver, the customer has to pay more than they should because of the risk premium that the supplier has to add. And working this way leads to a lack of transparency and to game playing on both sides.

But, if you have to do it:

• Obviously it’s going to require up-front planning and design work to understand and estimate everything that has to get done – which means you have to bend Agile methods a lot.
• You don’t have to allow changes – you can just work incrementally from the backlog that is defined upfront. Or you can restrict the customer to only changing their mind on priority of work to be done (which gives them transparency and some control), or allow them to substitute a new requirement for an existing requirement of the same size (Sutherland’s “Change for Free”).

To succeed in this kind of contract you have to:

• Invest a lot to do detailed, upfront requirements analysis, some design work, thorough acceptance test definition and estimation – by experienced people who are going to do the work
• Don’t allow changes in requirements or scope – just replacement / substitution
• Increase the margin of the contract price
• Make sure that you understand the problem you are working on – the domain and technology
• Deliver important things early and hope that the customer will be flexible with you towards the end if you still can’t deliver everything.

PMI-ACP on Agile Contracting?

For all of the projects that have been delivered using Agile methods, contracting seems to be still a work in progress. There are lots of good ideas and suggestions, but no solid answers.

I’ve gone through the study guide materials for the PMI-ACP certification to see what PMI has to say about contracting in Agile projects. There is the same stuff about Sutherland’s “Money for Nothing and your Change for Free” and a few other options. It’s clear that the PMI didn’t take contracting in Agile projects on as a serious problem. This means that they missed another opportunity to help large organizations and people working with large organizations (the kind of people who are going to care about the PMI-ACP certification) to understand how to work with Agile methods in real-life situations.