Agile Contracts and How to Utilize Them Effectively

Contracts are infamous for their rigidity, certainty, and lack of flexibility. That’s great when it comes to holding vendors or clients accountable to strict guidelines, but the problem arises when these agreements have limited adaptability in situations when flexibility would add more value than rigidity.

In this article, you’ll learn how Agile contracts enable your teams to collaborate with each other while still retaining shared accountability, and how contract management software can help you stay on top of these more flexible agreements.

What are Agile contracts?

Agile contracts are agreements designed to accommodate the flexibility and iterative process of Agile development. 

Unlike traditional contracts that fix scope, cost, and time upfront, Agile contracts allow for changes as the project evolves.

These types of agreements are gaining popularity as a way to more effectively manage certain kinds of projects that are defined by an ever-evolving scope of work — as we’ll see below. 

Limitations of traditional contracts

If your business needs a legal document that will virtually eliminate all uncertainty about a situation, that’s a traditional contract. Some trademarks of a traditional contract include:

Fixed scope

Traditional contracts are designed to keep the scope, cost, and time of a project fixed from the beginning. If there’s any room for adjustments, that room will be narrow and clearly-defined. 

Final delivery 

The main purpose of a traditional contract is to ensure that both parties meet their requirements within a set amount of time. After signing, you won’t find those parties collaborating on how to best achieve that goal incrementally. It’s mostly up to the party responsible for supplying the deliverables to make sure they all get delivered by the contract’s deadline.

Mistrust

Unfortunately, contracts are only necessary because stakeholders don’t always keep their word. If everyone did exactly what they said they would do, we wouldn’t need them! Traditional contracts clearly outline the specific consequences for not fulfilling your end of the deal  — which happens all too often. 

Lack of adaptability

With a traditional contract you can’t pivot when it comes to deliverables or timelines. Once you sign, you’re committed to the requirements of that contract until the end of its duration.

Types of Agile contracts

At their core, Agile contracts are defined by collaboration and flexibility, but that doesn’t mean both parties are afforded infinite grace when it comes to their legal obligations. On the contrary, Agile contracts actually afford both parties a more equitable share of the contract’s requirements. Here are some examples of Agile contracts and when they might be useful.

Fixed price

A fixed-price contract locks in the cost of a service, staying unchanged no matter what external factors come into play. This type of agreement places a shared responsibility onto the supplier and seller. Any changes in the cost are the supplier’s responsibility to manage on their end, but any changes in scope are the customer’s responsibility to manage.

This type of contract is best suited for low-risk, fixed-cost situations — where the prices are stable and delays are unlikely.   

For example, say a consulting firm agrees to implement a new financial software system for your company at a fixed fee of $250,000. Even if the project takes longer than expected or additional resources are needed, the cost remains the same, providing budget certainty for the CFO’s office. In this case, a fixed-price contract is probably sufficient.

Time and materials (T&M)

With a T&M contract, the customer pays the producer for their time and materials incrementally as a project progresses. For this reason, it places almost the entire burden of keeping costs down onto the producer. If the customer is concerned about the producer going over budget, however, they can place a cap on how much they are willing to pay in total.  

This type of contract encourages a high level of flexibility with a project that is likely to change in scope or cost. It’s also higher-risk due to the level of trust the customer must have with the producer. 

For example, say the CFO’s office hires a consulting firm for a financial system upgrade, paying for time and materials as the project evolves. To manage costs, a spending cap is set, balancing flexibility with budget control. This is a Time and Materials (T&M) contract.

Incremental delivery

An incremental delivery contract places separate evaluation dates into the contract — breaking it up into several smaller sprints. On these dates, both parties can decide if they are still satisfied with the agreement or would like to modify or even terminate it. 

If you’re able to obtain incremental pieces of the deliverable on a regular basis, this limits the risk of one or both parties being unsatisfied with the deliverables over time. This way, the customer sees that a product is being developed, and it keeps the producer from having to deliver a full product before it’s ready.

For example, consider a case in which you hire a firm to roll out a new budgeting system in phases. At each evaluation point, both parties review progress and decide whether to continue, adjust, or end the project, minimizing risk and improving alignment before the full system is delivered. This might call for an incremental delivery contract.

Shared risk

In a shared risk contract, both parties assume some of the risk associated with a project. For example, say your finance team partners with a consulting firm to implement a new accounting system. If the firm finishes the project early, they might get a bonus. If they finish late, they’re obligated to pay a penalty. In this scenario, your finance team and consulting form are equally invested in finding the most efficient way to create a satisfactory product.

This type of contract works the best in situations where you’re unsure of the outcome, as it encourages collaboration between the producer and customer to achieve the most satisfying results as quickly as they can. It also requires a lot of trust between the parties to work together in order to get the best results.

How to manage Agile contracts

As with all contract management, staying on top of your contract’s terms and well as any delivery dates is crucial. This is especially important with Agile contracts, as the cost and scope of projects can change throughout the contract lifecycle. Here are just a few benefits of using contract management software. 

• By using contract management software, you can see all proposed versions of a contract in the same place — so you know exactly how that contract is being affected before accepting the terms.
• You can also use artificial intelligence (AI) to extract metadata like incremental dates to help you stay on top of deadlines and deliverables.
• Set automated reminders to follow up with suppliers before those incremental dates creep up.

Conclusion

If your company is comfortable assuming a higher level of financial risk on an uncertain scope, then the flexibility afforded by an Agile contract could be a great way to start a new project. If, on the other hand, you don’t have the luxury of placing that much trust in a supplier, or you prefer a more stable deliverable, a traditional contract is probably the right decision.

Keep up with your ever-evolving Agile contracts, with Concord.

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