Scrum and Fixed Price Contracts

Fixed Priced contracts don’t make a great deal of sense in a Scrum world. This is really because traditional software development and Agile software development are two different paradigms … and solutions that work in one paradigm often doesn’t make sense in another.

This difference is paradigm is best explained by one of my favorite jokes from many years ago …

Q: How many surrealists does it take to change a lightbulb?
A: Giraffe!

In an environment where clients are only given one shot at getting the product they want, it makes sense to define your requirements upfront, and to then manage any risk by putting a dollar limit on the cost.

Agile teams are collaborative. And, they work the Product Backlog in the order specified by the Product Owner. If it makes sense to deliver high value functionality earlier they will do that. And, a good team will continue to incrementally deliver high value functionality on an ongoing basis.

The risk profile to the client is now substantially different because they’re getting regular increments of what they want in the order that they’ve specified. So, it’s reasonable to argue that a new type of contract would be more sensible for the new paradigm. And indeed there are different types of contract that work better than others [in an Agile environment].

I’ll write more about agile contracts in the final part of this series and I’ll present a number of contracts that are more suitable for software than fixed priced contracts. For this post, I’d like to discuss our options if there were no alternative to a fixed price contact.

How to do Agile with fixed price contacts?

Beware fixed-price, fixed-scope contracts [2]. These are the most difficult to navigate simply because if we fix both the price and scope then the only remaining variable is software quality. Scrum teams fix quality by having a robust (and invariant) Definition of Done. By fixing all three constraints; price, scope and quality we have a recipe for a death march [1] project.

An alternative to fixed-price, fixed-scope is to have a fixed-price, variable-scope contract. This works better because we can now fix product quality … but customers must now deal with variable scope.

This is not something they need be frighted of, rather it is a tremendous advantage to the customer. It does require changes in behavior; customers need to understand how to deliver value from prioritizing the backlog and, how to release early to drive revenue. Both of these ideas require quite different concepts of software and value, and hence neither of these changes are easy.

Variable-price, fixed-scope projects also work very well with Agile projects. These often go by the name of Time and Materials, with a fixed Scope. In a presentation at Agile 2008, Jeff Sutherland presented a paper called “Money for nothing and Change for Free” [3] in which he present two different strategies for fixed-price contracts which he called “Money for Nothing” and “Change for free”. Although there are some subtle differences, the strategies outlined by Jeff are either fixed-price, variable-scope or variable-price, fixed-scope.

A Better solution

Fixed priced contracts are part of the culture of software in many companies. It’s simply the way in which things are done. Part of the problem is that we have educated customers to expect fixed-price, fixed-scope by our past behavior. They have asked for fixed-price, fixed-scope and we have delivered exactly that [often at the expense of software quality]. The next time our customer want’s a product at a fixed cost they know who they can turn to.

To change the culture of fixed-price, fixed-scope contracts we need to change the culture of our industry; we need to push back and say that we value high quality products, and as a consequence we need to redefine our software contracts.

There is a risk in this approach. Our customers may decide to walk away and offer the work to a competitor. This is a question we need to discuss, and decide if producing a high quality product is worth that risk. I think it is.

In the last part of this series on fixed priced contracts, I’ll present a variety of contracts which are often used with Agile projects.

References

[1] http://en.wikipedia.org/wiki/Death_march_(project_management)
[2] In this article fellow Scrum Trainer, Jurgen, argues that fixed-price contracts are not only possible, but desirable. I feel that Jurgen has totally missed the point here. Sure, we can continue to do business the way that we always have done. I feel, however, if there is an opportunity to improve then we would be foolish not to take that opportunity.
[3] “Money for nothing and Change for Free” by Jeff Sutherland.

, , , ,

15 Responses to Scrum and Fixed Price Contracts

  1. @pinkhelix June 6, 2013 at 7:50 am #

    Kumana on Agile: Scrum and Fixed Price http://t.co/P6vbVwo7ww http://t.co/7ResvuXIsJ

  2. @paulborile May 8, 2013 at 1:08 am #

    interessante, su agile e fixed price contracts http://t.co/HKDZKZT7Iy

  3. @scahrens January 24, 2013 at 9:19 am #

    Scrum and Fixed Price Contracts
    http://t.co/JSFlgVrm #pmot #agile

  4. @PMI_Rochester January 24, 2013 at 9:19 am #

    Scrum and Fixed Price Contracts
    http://t.co/67Vd7Cvc #pmot #agile

  5. @acanimal December 26, 2012 at 7:36 pm #

    Scrum and Fixed Price Contracts | http://t.co/HmzglHOLhttp://t.co/Ng4B0j0x

  6. @simonkneafsey November 21, 2012 at 4:00 pm #

    Scrum and Fixed Price Contracts http://t.co/fudumW3R

  7. @peitor August 22, 2012 at 2:58 am #

    @scrumology @jurgenappelo says in his article: fixprice contracts work with scope that is high-level = variable.? Re: http://t.co/GyGqCjBk

    • scrumology August 22, 2012 at 11:44 am #

      It’s certainly possible, but it doesn’t address the underlying problems and dysfunctions. Specifically, fixed priced contracts tend to promote contract negotiations over collaboration. When I worked with fixed priced contracts [many years ago now], we called them You-f*ck-me, I-f*ck-you contracts simply because of the type of attitude these contracts foster. This is simply not a mature response to solving a business problem between a customer and a supplier.

      Side note: The name colorful name for fixed priced contracts was derived from the following scenario: You-f*ck-me by demanding the largest possible scope, in the shortest possible time, for the lowest possible cost. I-f*ck-you by charging a fortune for every change no matter how minor to the original specification (which we both know will be wrong because no one can predict the future).

      Personally, I prefer to deal directly with the dysfunction of the contract by replacing it with one that promotes collaboration. This simply takes away all the problems of fixed priced contracts with one sweep. And, it replaces those problems with a whole set of new problems … specifically, we need to educate customers in these new styles of contract (and in some cases we need to re-educate their behaviour and expectations). This process of educating customers is incredibly time consuming. It is, however, an approach that I much prefer because it tends to foster stronger business relationships. It is also a primary reason for my blog and the reason why much of the work that I do is free.

  8. @PSLTech July 22, 2012 at 11:15 pm #

    Scrum and Fixed Price Contracts http://t.co/5j4K6VPo

  9. Daniel Heitz (@dnlhtz) May 25, 2012 at 5:05 am #

    Q: How many surrealists does it take to change a lightbulb?
    A: Giraffe! … http://t.co/RDdhS4x9

  10. Jean-Louis Rigau (@jlrigau) May 21, 2012 at 2:58 pm #

    Scrum and Fixed Price Contracts | Scrumology http://t.co/EFDHdTp1

  11. Dennis Laumen (@DennisLaumen) January 6, 2012 at 12:03 am #

    On Scrum and fixed price contracts… http://t.co/3f30TtsW

  12. Sid on Agile (@SidOnAgile) January 2, 2012 at 12:08 am #

    Scrum and Fixed Price Contracts – Scrumology – http://t.co/BqqepZzL

Trackbacks/Pingbacks

  1. An overview of Agile Contracts - Scrumology.com - October 4, 2013

    […] Part 1 and Part 2. […]

  2. Fixed price & Agile « Best of Agile - November 28, 2011

    [...] http://scrumology.com/scrum-and-fixed-price-contracts/ [...]

(c) Scrumology Pty Ltd.

%d bloggers like this:
Read previous post:
Presentation: Introducing Scrum to an Organization

I recently did a presentation (hosted by Boost New Media in Wellington, NZ) about introducing Scrum to an Organization. It...

Close