Contracts can be a tricky business. It can be even trickier when government agencies try to write contracts for a vendor who works in an Agile manner. As government agencies are becoming more comfortable with Agile delivery, contracts are also evolving to become better vehicles to a successful Agile contract for both the client and the vendor.

In his book “Ten Contracts For Your Next Agile Project“, Peter Stevens provides a wealth of information about Agile contracts, development risks, sourcing Agile vendors, guidance on choosing the most appropriate Agile contract, and more. In this article, I will briefly summarize eight of the ten contracts described in Stevens’ book that can be used for Agile contracts in the government sector.

1. Fixed Price, Fixed Scope

Work stops when all requirements are met

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This may be the most common type of contract among government agencies. The entire scope of work is defined up-front, and the vendor is responsible for delivering all of it. This contract puts the bulk of the risk on the vendor, which gives the client a feeling of control because they have an answer to the questions: “How much will it cost?” and “When will it be done?” The vendor may mitigate this risk by charging higher costs for change requests after the initial delivery is complete.

This type of contract is based on three assumptions:

  1. The client knows exactly what they want up-front.
  2. The vendor knows exactly how to build it.
  3. Nothing will change along the way.

Anyone who has experience in project management has seen projects where these three assumptions do not materialize in reality. Moreover, the larger the project, the less likely all three assumptions will prove to be true.

The relationship between client and vendor has the potential to be confrontational because the client is motivated to squeeze in more changes at no cost, while the vendor is motivated to charge higher fees for change requests to mitigate their risks.

2. Time and Materials

Work stops when client decides

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This contract has no specified, detailed scope of work and no ceiling on cost. It may be appropriate when the scope of work is complex and not easily definable. Vendors prefer this type of contract because it has the potential for unlimited profit. Clients may be uncomfortable with this type of contract because the vendor does not have a strong motivation to minimize costs as much as possible. This type of contract comes to an end when the client simply stops paying the vendor.

3. Time and Materials with Fixed Scope and a Cost Ceiling

Work stops when all requirements are met

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This contract is the “best of both worlds” from a client’s perspective. If the project requires less effort than expected, the total cost is less. If the project requires more work than the vendor expected, then the cost does not go up. On the other hand, this is the “worst of both worlds” from a vendor perspective. As a result, reputable vendors may shy away from this type of contract.

4. Bonus and Penalty Clauses

Incentivizes the vendor to deliver faster

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The motivation for this contract type is strong when there is a critical delivery date from the client that cannot be changed. The client pays a bonus if the work is completed prior to the specified date, and charges a penalty if the date is missed. The relationship can be cooperative, but it could also degenerate if the vendor believes the client is dragging their feet to extend the project to the critical delivery date (or later).

5. Time and Materials with Variable Scope and a Cost Ceiling

Work stops at point of maximum profit

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This structure is the same as Type #2 above, Time and Materials, except that it puts a cap on the financial risk of the client. The client might not get every single requirement that they hoped for, however, the client carries less risk because they will get their highest priority requirements delivered early. It may be easier to maintain a cooperative relationship between client and vendor in this model, and it may be a good fit with an Agile vendor.

6. Phased Development

Project delivers functionality with new budget and priorities assigned quarterly

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In this approach, the client provides funding for a time-boxed three-month period. If the client is pleased with the delivery at the end of the three-month period, then the client will approve funding for another three-month period. This helps to promote a positive relationship between the client and vendor because both sides are motivated to make each delivery successful. The client’s risk is limited to one quarter’s worth of costs; however, the vendor may carry some risk if the governance of the next quarter’s funding approval isn’t done expeditiously. 

7. Fixed Profit

After target completion date, vendor works at cost (or reduced rate)

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Fixed Profit is a kinder, gentler version of Time and Materials with Fixed Scope and Cost Ceiling. It shares the risk between client and vendor. If the project goes over budget, the vendor continues to work on it, though at a lower rate that covers costs but results in reduced profit. At the same time, if the project finishes early, the client pays less. This motivates the vendor to finish by the completion date, and it also reduces costs for the client if the work extends beyond the completion date. This shared risk and cooperation could result in a positive relationship between client and vendor.

8. Money for Nothing, Changes for Free

After target completion date, vendor works at cost (or reduced rate)

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Jeff Sutherland (co-creator of Scrum) named this contract model after a 1985 song by Dire Straits. This contract type encourages both the client and the vendor to focus on the work that delivers the most value. The vendor does the work on a Time and Materials basis with a cost target. Once enough value has been delivered, the client can cancel the project with a cancellation fee equal to the remaining profit due to the vendor (the vendor gets “Money for Nothing”).

Alternatively, the client can use the remaining funds for new change requests that will give them more value (the client gets “Changes for Free”). Since both the client and the vendor are motivated to deploy the highest value work first, this approach can result in a positive and cooperative relationship.

Of all of these contract models, Types 1 – 4 are probably less compatible with an Agile delivery model that’s successful for both the vendor and the client. The remaining contract models, Types 5 – 8, are more likely to work to the benefit of both the client and the vendor with an Agile delivery.

The foundation of any successful contract is trust. If there is high trust between the client and the vendor, then almost any contract type can be successful. Contract Types 5 – 8 above are additional ways to “grease the wheels” for a contract with Agile delivery to have positive outcomes for all parties.

This work, “8 Types of Agile Contracts Explained” is a derivative of “10 Contracts For Your Next Agile Project” by Peter Stevens used under CC BY-NC-SA 4.0. “Eight Types of Agile Contracts With Pictures” is licensed under CC BY-NC-SA 4.0 by Steve Schmitz.