Agile Contracting

In today’s fast-paced and constantly evolving business world, traditional contracts between suppliers and contractors often no longer meet the dynamic requirements and complexity of projects. This is where agile contracting comes into play. Agile contracting is a framework that enables flexibility, collaboration and adaptability in project delivery, ensuring successful outcomes even in the face of uncertainty. This is not just an issue in the area of software development. Agile transformation in particular must be understood as a highly complex undertaking.

In this blog post, we look at the concept of agile contracting, its importance in complex environments, different models of agile contracting, performance measurement, success factors and positive examples that illustrate its effectiveness.

What are typical contracts between supplier and contractor?

Conventional contracts between suppliers and contractors are often based on a fixed scope, a fixed price and a fixed timeframe. These contracts set out clear expectations in terms of deliverables, costs and deadlines. However, for complex projects where requirements are likely to change, strict adherence to these contracts can lead to inefficiencies and missed opportunities. Agile contracting recognizes this limitation and offers an alternative approach that encourages collaboration, iterative development and continuous improvement.

Why is agile contracting necessary in a complex environment?

In complex environments where requirements are constantly changing and uncertainty prevails, agile contracting provides the flexibility to adapt and respond effectively. It embraces the principles of agile project management and allows for incremental iterations, early feedback and constant communication between supplier and contractor. By introducing agile contracting, companies can better control risk, reduce time to market and increase customer satisfaction.

What commissioning models are available?

There are various procurement models that companies can use depending on their specific needs and circumstances. However, these have disadvantages that cannot be ignored, especially in a complex environment. Some of the most common models are:

1. Time and Materials (T&M): This model allows flexibility in terms of scope and timing. The provider is paid based on the time and effort invested and the cost of the materials used. This model is suitable when requirements are uncertain or likely to change. The challenge with Time & Materials contracts is that the risk is solely with the provider. Systemically, the impulse can arise with the contractor: “Contract is signed, money is coming, content is secondary for now”. Clients tend to shy away from the Time & Materials approach in its traditional form.
2. Fixed budget: In this model, the provider and contractor agree on a fixed budget for the project. The scope and schedule can still be flexible, allowing for iterations and adjustments as needed. The provider is responsible for delivering the project within the agreed budget. In this system, we have a shift of risk to the provider’s side. The provider has a fixed budget on which the service is provided. In a complex environment, however, this can be very difficult. In order to reduce the (financial) risk, the provider will therefore include sufficient margin in the calculation. The client may therefore pay more than is actually necessary.
3. Result-Oriented: In this model, the focus is on achieving a specific outcome or business value. The provider and contractor work together to define the desired outcomes, and the provider is paid based on the achievement of those outcomes. This model encourages collaboration and shared responsibility. From an agile contracting perspective, this is probably the most sensible option. However, successful implementation requires control mechanisms as well as motivators that are in harmony.
4. Initial Approach and Iterative Development: This model focuses on early collaboration between suppliers and contractors to define the initial approach and set the direction of the project. Project trust has already been developed here, based on the results-oriented approach, for example. Iterative development, characterized by several short iterations, ensures continuous feedback and allows for adjustments based on changing requirements.

Is it possible to calculate performance using relative effort?

Performance in Agile Contracting is not only measured by traditional metrics such as adherence to schedule or budget. Instead, Agile Contracting focuses on adding value by meeting user needs and achieving project goals. Key performance indicators include customer satisfaction, cycle time reduction and the number of features delivered per iteration. These metrics provide a holistic overview of project performance and enable continuous improvement.

However, in agile contracting, it is not uncommon for performance to be calculated using metrics that are in line with agile principles. Two common metrics that are (unfortunately) used in agile contracting are Agile Function Points (AFP) and Story Points.

Agile Function Points (AFP) measure the functional scope of deliverables, taking into account factors such as complexity, user interactions and business value. Story points, on the other hand, estimate the relative effort required to complete a user story or task. These metrics are often used as a basis for evaluating progress, productivity and quality of work during the project.

However, they are not conflict-free. If the evaluation is based on story points, for example, there is a systemic motivation to get as little work as possible into as many story points as possible. This is the contractor’s lever to work positively on their own margin. In order to reduce inflation, there is usually a lot of potential for conflict in communication. This puts a strain on the joint partnership.

What are the most important factors for successful agile procurement?

Successful agile contracting requires a combination of factors, including:

1. Clear Expectations and Alignment: Setting clear expectations, defining project goals and aligning them with the company’s strategic goals form the basis for successful agile contracting. Both sides should define the actual goal together.
2. Clear and Open Communication: Effective communication between the provider and the contractor is crucial. Regular meetings, feedback sessions and transparent reporting ensure that stakeholders are aligned and any concerns and issues are addressed promptly.
3. Collaboration and Trust: Agile contracting thrives on collaboration and trust. Both parties should work together as a team, share responsibility and utilize each other’s expertise to achieve successful results.
4. Flexibility and Adaptability: Agile contracting is open to change and promotes adaptability. Both the provider and the contractor should be prepared to adjust plans, requirements and schedules as needed.
5. Definition of Done: A clear definition of the term “Done” ensures that both parties agree on the expected results, quality standards and acceptance criteria.
6. Joint Supervisory Bodies: In order to be able to proceed in a “results-oriented” manner in the contract, joint control bodies are necessary. For example, a sprint system can be used in which the upcoming work is planned and then jointly reviewed.
7. Predictability Of Sales: The contractor needs a certain degree of predictability of sales. If the client also has the option of terminating the collaboration prematurely, this should not be done ad hoc but with an agreed lead time. This also helps with the processing and handover of previous expenses.

In this setting, a system is created which, on the one hand, takes into account the necessary flexibility of a complex environment and, on the other hand, harmonizes the distribution of risk between contractor and client. The contractor has a certain degree of financial security as well as the motivation to deliver good work. The client, on the other hand, has the flexibility to terminate a project prematurely if the work is not good. In addition, mechanisms are built in to make the effort flexible.

What are the positive examples?

Many companies have successfully introduced and benefited from agile contracting. One such example is a software development company that adopted an agile contracting approach for a complex project. Through flexibility and collaboration, the company was able to deliver high-quality software within a shorter timeframe and exceed the client’s expectations. The iterative nature of agile contracting allowed for continuous feedback and adjustments, resulting in a product that met the evolving needs of the end users.

Conclusion

Agile contracting offers a refreshing alternative to traditional contracts in complex environments. Through flexibility, collaboration and adaptability, companies can overcome uncertainties, manage risks and achieve successful outcomes. Agile contracting models provide a framework that can be tailored to specific project requirements. With clear communication, collaboration and a shared understanding of performance metrics, organizations can be successful in their agile contracting efforts. Whether you’re a vendor or a contractor, it’s worth looking into agile contracting to develop a common initial approach and possibly adopt it.