Agile Contracts Creating and Managing Successful Projects with Scrum Wiley Series in Systems Engineering and Management Series

A methodologically sophisticated, comprehensive approach to applying the Agile fixed-price contract to IT projects while maximizing customer and supplier relationships

"Interesting and necessary for IT managers and IT lawyers."
—Walter J. Jaburek, Dipl.-Ing., Dr. iur., Dr. techn.

Approximately 50 percent of software developers use Scrum, an iterative and incremental development method for managing software projects and product or application development, in their work. The benefit of Scrum and other Agile methods is that they can address shifts in a large project that traditional managerial methods cannot.

Written by pioneers and leaders in the field of Agile and Scrum, Agile Contracts is the only book dedicated exclusively to the legal, procurement, and project management considerations of Agile contracts. Providing templates, a toolbox, and examples of Agile fixed-price contracts, the book presents an alternative option to fixed-price, time-based, and supply-based contracts—reducing the risk for both the supplier and the customer with a contract that offers the possibility of flux and flexible scenarios as a project progresses.

Agile Contracts features in-depth chapter coverage of:

• The Agile Manifesto of 2001
• Agility from the perspective of procurement and the software provider
• The problems with traditional fixed-price contracts and time material contracts
• What the Agile fixed-price contract is and how it is set up
• Tendering based on the Agile fixed-price contract
• How to negotiate an Agile fixed-price contract
• Special guidelines for the legal framework of an Agile fixed-price contract
• Adaptable Scope System
• The Black Swan scenario
• Contracts and procedures for the featured methodologies

Especially applicable within highly structured business organizations, Agile Contracts is a must-read for project managers, agile practitioners, procurement representatives, and IT lawyers.

Preface ix

Acknowledgments xiii

1. Agility: What Is That? 1

1.1 The Agile Manifesto of 2001 6

1.2 Agile Development Based on Scrum 11

1.2.1 The Principles of Organization 14

1.2.2 The Process Model 14

1.2.3 Estimation in Scrum 19

1.3 Agility from the Perspective of Procurement 23

1.4 Agility from the Perspective of the Software Provider 25

1.5 The 12 Principles of Agile Software Development 26

1.6 Summary 32

2. The Missing Piece of the Puzzle 33

2.1 The Problems with Traditional Fixed-Price Contracts 37

2.2 The Problems with Time and Materials Contracts 43

2.3 Something New: The Agile Fixed-Price Contract 44

2.4 Summary 45

3. What Is an Agile Fixed-Price Contract? 47

3.1 Existing Approaches 48

3.2 The Agile Fixed-Price Contract 49

3.2.1 How Is an Agile Fixed-Price Contract Set Up? 50

3.3 Summary 71

4. Sample of an Agile Fixed-Price Contract 73

Preamble 74

§1 Definitions and Clarifications of Terms 75

§2 Contract Scope and Hierarchy of Documents 78

§3 Usage Rights 79

§4 Transparency and “Open Books” 79

§5 Acceptance 80

§6 Obligation of Both Parties to Co-Operate 81

§7 Client’s Obligations 84

§8 Escalation to the Steering Board and the Independent Experts 84

§9 Project Period 85

§10 Warranty, Compensation, and Indemnifi cation 86

§11 Limitation of Liability 86

§12 Contractor’s Compensation 87

§13 Force Majeure 87

§14 Secrecy 87

§15 Severability Clause 88

§16 Place of Performance, Jurisdiction, and Applicable Law 88

Appendix A: Commercial Agreements 88

Prices 88

Commercial Approach to the Project 90

Payment Milestones 92

Appendix B: Technical Scope and Process 92

Requirements: Backlog and Vision 92

Process for Development and Approval 93

Changes to the Contract (Exchange for Free) 95

Deliverables and Services 97

Mechanism to Calculate Costs of Future User Stories 98

Appendix C: 12 Principles of Cooperation 101

Appendix D: Quality Standards—Definition of Done 107

5. Tendering Based on an Agile Fixed-Price Contract 109

5.1 Appropriate Tender Content for an Agile Fixed-Price Contract 112

5.2 Requirements for Tendering and Selection 116

5.2.1 Competition 116

5.2.2 Comparability and Transparency 119

5.3 Tendering Steps with a Focus on Agile Fixed Price 122

5.3.1 Internal Goal Setting and Coordination 123

5.3.2 Preparation for the Invitation to Tender 124

5.3.3 Tender 126

5.3.4 Awarding of the Tender 130

5.3.5 Price Optimization Options 132

5.3.6 Project and Contract Management 134

5.3.7 Effort Inherent in the Tendering Process 134

5.4 Summary 134

6. Special Requirements for the Legal Framework of an Agile Fixed-Price Contract 137

6.1 Adaptable System for Scope 139

6.2 Warranty and Damages 140

6.3 Schedule and Milestones 141

6.4 Path of Escalation 142

6.5 Obligations 143

6.6 Summary 143

7. Guideline for the Negotiation of an Agile Fixed-Price Contract 145

7.1 Objectives of the Client 147

7.2 Objectives of the Contractor 148

7.3 Objectives and Bonus Payouts of the People Involved 149

7.4 Strategy for the Project and the Negotiation 151

7.5 Tactics for the Negotiation 152

7.6 Price Determination 155

7.7 Conclusion of the Negotiation and Project Steering 155

7.8 Conclusions 156

8. Advantages and Disadvantages of Agile Fixed-Price Contracts 157

8.1 Detailed Analysis of the Pros and Cons 158

8.1.1 Budget Security 159

8.1.2 Requirement Flexibility 159

8.1.3 Detailed Requirements 160

8.1.4 Negotiating Costs 160

8.1.5 Estimate Security 160

8.1.6 Quality Risk 160

8.1.7 Price Elevation Tendency 161

8.1.8 Probability of Winning a Project Tender 161

8.1.9 Cost Risk 161

8.1.10 Security to Deliver a Project as a Whole 161

8.1.11 Acceptance Efforts 174

8.1.12 Pricing Transparency 174

8.1.13 Progress Transparency 174

8.1.14 Permanent Regulation 174

8.1.15 Securing the Investment 174

8.2 Summary and Overview 182

8.3 Conclusions 184

9. Toolbox for Agile Fixed-Price Contracts 185

9.1 Stimulating Interest Before the Negotiation 186

9.2 Identifying Issues of the Other Party 189

9.3 Establishing Common Language and Experiences 189

9.4 Feature Shoot-out 191

9.5 The Black Swan Scenario 192

9.6 Workshop on Contract Setup 192

9.7 Reports and Metrics 196

9.7.1 KISS Backlog View 196

9.7.2 Focus: There Is a Single Goal! 197

10. Practical Examples 199

10.1 Example 1: Software Integration in a Migration Project 200

10.1.1 Initial Situation 200

10.1.2 Contract and Procedure for Traditional Methodologies 202

10.1.3 Contract and Procedure for Agile Methodologies 213

10.1.4 Contract for Example 1 222

10.2 Example 2: Creating a Software Product 240

10.2.1 Initial Situation 241

10.2.2 Contract and Procedure for a Traditional Fixed-Price Contract 241

10.2.3 Contract and Procedure for a Time and Materials Contract 253

10.2.4 Contract and Procedure for an Agile Fixed-Price Contract 261

10.2.5 Conclusions 268

Appendix: Questions and Answers 271

References 275

Index 279

Andreas Opelt is Vice President for Sales, Product Marketing, and Partner Management at Infonova.

Boris Gloger is ranked worldwide among the pioneers of Scrum. He continues to develop practices and set training standards internationally.

Wolfgang Pfarl is a trained lawyer and is responsible for the IT procurement at the Austrian Post.

Ralf Mittermayr is a partner at BearingPoint and focuses on conceptual design and delivery of complex software solutions to the banking, telecommunications, and supply industries.