In my book,
Project Management the Agile Way, now in its second edition, I make this statement in the chapter on contracts:
Firm Fixed Price (FFP) completion contracts are inappropriate for contracting agile.
I got an email from a reader challenging that assertion, to which I responded:
I always start by asserting that agile is a "fixed price" methodology. But, there is a big difference between a
contract for your best effort at a fixed price, and a fixed price contract for working product, to wit:
"fixed scope completion"
There's no problem whatsoever in conveying best effort at fixed price through a contract mechanism; it's quite another thing to convey fixed price for a working product of fixed scope.
Agile is a methodology that honors the plan-driven case for strategic intent and business value; but agile is also a methodology that is tactically changeable -- thus emergent in character -- re interpretation of the plan.
Using the definition that strategic intent is the intended discriminating difference to be attained in the "far" future, a project can be chartered to develop the product drivers for that discriminating difference. Thus, think of agile as iterative tactically, and plan-driven strategically.
The sponsor has control of the strategy; the project team has control of many of the tactics.
Re FFP specifically, I was aiming my arguments primarily at the public sector community, and particularly the US federal acquisition protocols. The public sector -- federal or otherwise -- usually goes to a great deal of trouble to carefully prescribe contract relationships, and the means to monitor and control scope, cost, and schedule.
In particular, in the federal sector, only the "contracting officer" -- who is a legal person usually -- has the authority to accept a change in the written description of scope, a change in the cost obligated, or a change in the delivery schedule and location. The CO ordinarily has one or more official "representatives" (CORs) or technical representatives (COTRS) that are empowered to "interpret" changes, etc,
In the commercial business domain, the concepts of contract protocols are usually much more relaxed, starting with the whole concept of a CO and COR -- many businesses simply don't have a CO at all... just an executive that is empowered to sign a PO or a contract. Thus, there are many flexibilities afforded in the private sector not available to public sector
When I say "fixed price", in effect I am saying "not cost reimbursable". Cost reimbursable is quite common in science and technology contracts in the public sector, but almost never in the "IT" sector, public or private. So, I find that many IT execs have little understanding why you might write a contract for a contractor to take your money and not pledge completion of the original scope.
Working from the perspective of "not cost reimbursable", I make the point about a FFP completion contract as distinct from other forms of fixed price arrangements, like best effort. In my opinion, agile is not an appropriate methodology for a completion contract in the way in which I use the term, to wit: Pass me the money and I will "complete the work" you describe in the contract when we sign the deal.
However, there are FP alternatives for a traditional completion effort, the best of the lot in my opinion being a FP framework within which each iteration being a separate and negotiated fixed scope and fixed price job order wherein the job order backlog is planned case by case.
However, even in such a JO arrangement, the customer is "not allowed" to trade or manage the backlog in such a way that the business case for the strategic value is compromised. The project narrative must be "stationary" (invariant to time or location of observation); although the JO nuts and bolts can be emergent.
Typically if the agile principle of persistent team structure is being followed, where the team metrics for throughput (velocity x time) are benchmarked, then the cost of a JO is almost the same every time -- plus or minus a SME or special tool -- and thus the "price" of the contract is "fixed" simply by limiting the number of JOs what will fit within the cost ceiling.
There are other factors which are vexing in the public sector in a FP contract arrangement:
1. Agile promotes a shift in allegiance from the specification being dominant to the customer needs/wants/priorities being dominate. Try telling a CO you are not going to honor the spec as the first precedence!
2. Following on from a shift in allegiance, what then is the contractual definition of "done". Is the project done when the money runs out (best effort); when the backlog is exhausted (all requirements satisfied); or the customer simply says "I've got what I want"? This debate drives the COs nuts.
3. How does a COTR verify and validate (V and V)? In the federal sector, V and V is almost a religion. But, what's to be validated? Typically, verify means everything that is supposed to be delivered got delivered; validated means it meets the quality standard of fitness for use. If the scope is continuously variable, what's to be verified? What do you tell the CO?
4.
I suggest a "grand bargain" between sponsor and PM (with customer's needs in the frame) wherein for a fixed investment and usually a fixed time frame the PM is charged with delivering the best value possible. Can the "grand bargain" be contracted? Sure, we usually call it "best value"
Best value is defined as the maximum scope (feature/function/performance) possible that conforms to the customer's urgency/need/want as determined iteratively (somewhat on the fly).
Thus requirements are allowed to be driven (dependent) by customer's direction of urgency/need/want and available cost and schedule (independent).
Where the customer doesn't usually get a vote is on the non-functional requirements, especially those required to maintain certifications (like SEI level or ISO), compliance to certain regulations (particularly in safety, or some finance (SOx)), or certain internal standards (engineering or architecture)
