Contract-182x182Contract negotiations between supplier and client, whether Time and Materials or Fixed-Price, takes time. This time simply delays the start of the project.  Eventually pressure will be built and decisions made that perhaps one or both parties will regret.

Essentially however, whatever anybody says about win/win, it is simply two elephants testing the strength of the other and during any traditional I.T. related project negotiation, both parties will certainly be thrusting their demands based on these opposing thoughts:

 

Client, “The Business”

Supplier, Vendor, Internal IT Department

I need to get him to drop his daily rates to below 1000 / day. I cannot go below to 1000 / day.
I need the supplier’s best guys. The contract must be anonymous so that I can put who I like on the job and keep the best people free to win jobs elsewhere.
I need to make sure we have a full list of requirements, as the supplier will challenge everyone of them. I need to have 40% for contingency.  How can I position this?
This vendor always stretches the contract. If I can get the signature, I know that I can get a little more out of the client. A 10%-20% delay is ok, especially if T&M and this client usually understands and pays.
I can sign this contract even though there are so many unknowns – I’ll probably not be held responsible for it in 12 months anyway. I know that when the project starts to reach a critical point, in 12 months time, I may not be around anyway and someone else will be running the project by then.  It certainly won’t be my responsibility by then.
I am not going to see anything for 9 months.  How do I keep on top? As soon as we have the signature, we can get down to work in our own offices and keep focused on delivering the agreed scope.
If they are late, I want compensation. If we are early, do we get a bonus?
Time and Materials is ok but I’d prefer Fixed Price I don’t want Fixed-Price, I’d prefer Time and Materials as I also get a constant monthly cash flow.
I want to defer payment as long as possible on this Fixed Price contract. I want to get as much money as possible as early as possible.
I need to keep the same team together for the next phase. I can keep my people on this project for a long time, a real cash-cow! Even though my people will stale and I run the risk of losing them.  I’ll face that problem if it happens.
Them! Them!

 

In almost all cases, the focus is on people, cost, time and scope.

Rarely is the discussion about coming in under budget, early with a satisfied client getting just what he needs, no more, no less.

Yet Agile methodologies allow us to do exactly this and to ban Fixed Price projects forever and to terminate Time & Material contracts.

This article illustrates how this can be achieved and shows how simple it becomes to change the mind-set so that all those involved benefit, including the supplier, client, people and both bank accounts!

Setting the Scene

A supplier and client have agreed that it is reasonable to expect the work to take a seven-man team one man-year (200 man days) to complete a project at a rate of 1000 USD per person per day.

7 * 200 * 1000 = 1’400’000 USD

At this point the negotiations could evolve into a discussion on whether or not the contract is Fixed Price or Time and Materials. This further negotiation, as hinted above, would take time and the project would be further delayed. As an alternative we could adopt a new model known as “Money for Nothing and Change for Free”.

This is only possible in Agile projects delivering working code with timeboxes or sprints which are 2 or 3 weeks in length.

Given Agile teams, there is one pre-requisites regarding the requirements that must be present before work commences:

  • It is necessary to have a list of requirements, at a high-level, planned for the projects with the most important items first and all the coulds at the end of the project. These requirements are planned at a high-level showing the focus of each timebox in the plan.

Change is for Free

In any traditional project, the impact of change can be immense. It costs time and energy and nerves for both sides. With “Change is for Free” however, it is totally free and nerves are spared.

For this to work, the client has to understand that he is totally responsible for any changes in scope. There are two rules:

  1. Changes may only take affect at the start of a new timebox/sprint and not in the middle.
  2. The client needs to understand and appreciate the impact of change. Impacts can be classified as follows:
    • New items are added to the high-level plan according to their priority. Lower priority items will get pushed down the plan schedule. Low priority items due for completion at the end of a project (i.e. in the last timebox) may drop off completely going “out-of-scope”. The client needs to understand that this may be the consequence of the new addition.
    • Changing priorities of items in the schedule may be complicated by dependencies. Teams may have to ‘deliver first but engineer later’. This means that the team builds a quick-and-dirty solution and delivers to the business but the solution will require re-work. This re-work will need to be accommodated in the plan (thus adding to the scope, with the consequence that a lower-priority item may not make it) but at least the business can be profiting from the feature.
    • Cancelling an item. Always welcome. Yet simply cancelling may not be possible as there may be dependencies on the “to be cancelled” item.

Change does indeed come for free. No time is lost renegotiating and no time is spent on re-agreeing the price. The teams can just get on with it.  That has to be a good thing.

Money for Nothing

Everyone understands that 80% of users will only use 20% of the features.  20% of the effort provides 80% of the required functionality.  There are many more such 20/80 examples.

During the course of the project, functionality is delivered frequently and fit-for-purpose. As we have been focusing on delivering the most important features first we may have already delivered a workable solution that the client is happy with.  This could mean that after 40% of the budget has been used the client could stop the project: 60% under budget!  The client, who is now responsible for the scope may of course make this call.  [The best example that I know of was 25%]

However, to be fair, the supplier needs to be compensated for allocating and reserving resources for the full duration.  This is where the client offers a certain percentage, say 20%, of the remaining budget.

Thus, for NOT delivering the remaining low-priority features, one could argue that the supplier gets money for doing NOTHING – hence “money for nothing” – and the client saves 80% of the remaining budget.

One other factor to take into consideration is that the team and the client know that the items towards the end of the project are low-priority so motivation will naturally wane.  This adds extra incentive to stop early.

Using the example introduced earlier, the budget for the entire project is 1’400’000 USD spread over a period of one year.  The 40%, 60% and 80% completion mark points are also shown as red crosses.

This simply illustrates that all the high-priority items are implemented at the start of the project. Low priority items are done at the tail-end of the project.

Money-For-Nothing-Master

Let’s take the example where the project is stopped after 80% of the budget has been used.
Money-For-Nothing-80

So only low-priority items are left. However, the vast majority of items have already been delivered. This should be more than enough for the business to take the software and operate efficiently. 20% of the budget is thus shared.

Supplier Bonus Client Saves
20% remains of 1’400’000 = 280’000 * 20% = 56’000

Or 4% of the entire budget for doing nothing.

Or 5% mark-up on revenue (56’000/1’120’000)

Total Client Costs = 80% of budget + Supplier bonus

1’120’000 + 56’000 = 1’176’000.

Thus a saving of 224’000, which is 16% under budget

The project is also delivered a month early.

Let’s take the example where the project is stopped after 60% of the budget has been used.

Money-For-Nothing-60

In this case, more items are yet to be delivered. However, the majority of high priority items have been delivered. 40% of the budget is then shared.

Supplier Bonus Client Saves
40% remains of 1’400’000 = 560’000 * 20% = 112’000

Or 8% of the entire budget for doing nothing.

Or 13% mark-up on revenue (112’000/840’000).

Total Client Costs = 60% of budget + Supplier bonus

840’000 + 112’000 = 952’000.

Thus a saving of 448’000, which is 32% under budget

The project is delivered within 8 months not 12.

It can be seen that this is about the point that it becomes extremely interesting, financially to stop the project early. Significant cost savings and profitability can be seen to be achievable whilst still delivering what the client really needs, no more, no less.

At first glance this next example may appear to be unrealistic. Remember however, that 80% of the features most used are delivered by 20% of the project’s effort, so it is not that unrealistic! Let’s take the example where the project is stopped after 40% of the budget has been used.

Money-For-Nothing-40

In this case, only the high priority requirements have been delivered. 60% of the budget is then shared.

Supplier Bonus Client Saves
60% remains of 1’400’000 = 840’000 * 20% = 168’000

Or 12% of the entire budget for doing nothing.

Or 30% mark-up on revenue (168’000/560’000)

Total Client Costs = 40% of budget + Supplier bonus

560’000 + 168’000 = 728’000.

Thus a saving of 672’000, which is 48% under budget

The project is delivered within 5 months not 12. Maintenance is easier and thus cheaper as the solution is a whole lot less complex than it otherwise would have been.

 

Summary

When combining “Change for Free” with “Money for Nothing”, everyone is aligned to produce only that which the clients needs, nothing more, nothing less and in fact everybody is now focused on delivering early as both sides win – it is a real win/win situation which is not possible in either Fixed-Price or Time and Material contracts.

This model is however, only possible with Agile teams.

One last point – there may be one individual that is unhappy: The supplier’s salesman as he needs to generate far more leads to keep people occupied.