Agile Contract Management

What Is Agile Contract Management?

Agile is a methodology that stresses the value of maximum flexibility. Originally developed for software engineering teams, Agile helps ensure that projects are completed in short, demonstrable steps with frequent interfacing with clients.

Agile is built around the concept of using short, focused project cycles called sprints. In a sprint, teams direct their efforts toward an achievable goal that can be completed in a few weeks. When the goal is completed, teams show customers the completed work and receive feedback.

In the past, project teams would wait to deliver to customers until the work was completely finished. With Agile, however, the focus is on presenting work to customers on a consistent basis so that they might be included in the management process and tweak their expectations accordingly.

Agile in Contract Management

For contract management professionals, Agile stresses the value of frequent collaboration between negotiating parties, rather than a hardline, take-it-or-leave-it approach. In keeping with the spirit of the methodology, an Agile contract is built with the understanding that changes to the project will inevitably occur, and that the contract must therefore be written in such as way as to minimize damage for both parties when timeframes or costs are adjusted.

When changes do occur, an Agile contract is not designed to be punitive. The focus of Agile is on establishing a positive working relationship between contract parties that allows for a flexible and appropriate response to change, not on establishing one party as victorious over the other.

There are three approaches to contract management that tend to be used with Agile: Capped T&M, incremental delivery and target cost contracts. No one approach is inherently superior to the others, and each may be used in certain circumstances to the benefit of both parties to the contract.

Capped T&M

In a traditional time and materials (T&M) contract, suppliers are guaranteed sufficient resources to cover costs as they change. Customers, however, have no such protection, and are often forced to pay the additional costs to the supplier.

Capped T&M contracts, on the other hand, are designed to put an upper limit on any additional amount a customer might have to pay. This way, suppliers get the benefit of additional resources if their timeframes change toward the beginning of the project, but customers also get the benefit of knowing that at no point would overall expenses be allowed to rise too high.

Incremental Delivery

In keeping with the Agile philosophy, incremental delivery contracts are designed to allow customers regular points of inspection throughout the project lifecycle. At each of these points, the customer may choose to continue with the project or take what has been produced thus far and terminate. This may give the customer peace of mind that the project will only be allowed to continue to a point where he or she is comfortable. The frequency of these inspection points and the conditions for withdrawal, including adequate compensation for development teams, is often negotiated into the contract.

Target Cost

In target cost contracts, both developers and customers agree on a prospective final price of the service at the negotiation stage. If costs run lower than expected, both developers and customers share in the savings. If costs are higher than expected, both parties pay a share of the additional cost. This incentivizes staying under budget where possible while also spreading out the risk if things do cost more.

Agile Contract Management in Business

Agile is an exciting development in contract management, because it attempts to tear down the old belief that there are always winners and losers in competitive negotiations. Each of the three contract management styles mentioned in this article has the feature of simultaneously being beneficial to both the customer and the contractor.

When both parties are happy with a negotiation, and with the terms under which the customer will obtain the final deliverable, the probability of future business dealings can greatly be increased. If a business wishes to safeguard its future and develop a positive reputation, Agile Contract Management is one approach that should be strongly considered.