Having Your Cake and Eating It? Fixed-Price Contracts and Agile

One option available to carriers when contracting for AppDev and package implementation is the fixed-price contract. Many carriers swear by them as a mechanism to hold vendors accountable and manage the schedule and budget risk. Some view them as the only rational way to buy services.

However, fixed-price contracts have a darker side. They are, at their core, based on the same ideas that underpin waterfall: scope is defined and documented upfront, assumptions are used to caveat unknowns, and the vendor then develops estimates to determine the price and schedule.

These ideas are at odds with Agile—and since Agile is the most significant factor behind software delivery outcome improvements over the last ten years, insurers should approach these arrangements with their eyes wide open.

Change is a constant in software delivery. Inhibit change (e.g., via process, contract), and you are not really doing Agile anymore. This fact is why many vendors will describe their process as “Agile-like,” not Agile. Rather than embrace change based on newly uncovered information, fixed-price contracts inhibit change and reward “sticking the course,” even though the course may lead to a less favorable outcome.

Scope changes may not have financial implications early on, but the pressure to monetize the change management process will grow as the vendor uses up its contingency budget. Carriers push back on changes that have cost implications—they got a fixed price, after all!—while vendors will argue that new changes are out of scope, pointing to the fine print in the scope or assumptions. The relationship deteriorates, and it can end quite badly.

There are several other reasons why these contracts are not silver bullets:

  • Cost inflation. Vendor “skin in the game” comes at a cost. Fixed-price engagements typically cost 25-50% more than the equivalent T&M project because of vendor contingency. Scoping work needed to define the contract often requires a separate definition phase, which is an expense over and above the equivalent T&M engagement.
  • Limited protection. Change management and budget overrun are still issues in fixed-price contracts, as noted above. It simply isn’t possible to define immutable requirements and assumptions, even with an exhaustive discovery phase. Users often don’t know what they want until they see it.
  • Overhead. Tracking and managing project changes in excruciating detail and arguing the contract’s fine print involves significant project overhead. It is also thankless, demoralizing, and increases employee attrition.
  • Misalignment of incentives. Outsourcing works best when carrier and vendor teams align on incentives and can work as partners to deliver the project. Fixed-priced contracts misalign incentives from the outset, creating a “them and us” situation and reducing the potential for vendors and carriers to form a lasting partnership.

Fixed-price contracts are not an all-purpose panacea: They have downsides that carriers need to balance with the risk migration upsides they can provide. Understanding where fixed-price contracts work well is critical. Carriers would also be wise to consider approaches that better align incentives between the contracting parties, allowing for positive project change while still providing financial and risk safeguards.

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