Incremental Contracts

An alternative to existing fixed priced contracts is an Incremental Contract. But what are Incremental Contracts and how are they different form traditional Fixed-Price Contracts? This is an introduction to Incremental Contracts and the advantages that they hold.

Update 1: I made a video to outline how Incremental Contracts are structured, some pros and cons, and an outline of how they’re costed. I’ve included the video below.

Update 2: And I made another video which explains why Incremental Contracts are important. Simply put, fixed-priced contracts don’t work with Scrum. Here’s the explanation of why doing a fixed-priced contract with Scrum is a poor decision.

Update 3: You can now download the notes that I made for the two videos above as a pdf file! Clicking the button below will start the download. This work is released under the Creative Commons Attribution license (CC BY 4.0).

Incremental Contracts

Disclaimer: This is not legal advice, and I am not a lawyer. You need to have this contract reviewed by your lawyer before you sign anything. You can download the annotate version of the contract here, and you can download the full contract here.

It is becoming more and more obvious that the traditional fixed priced contract (where the timeframe, scope and cost are fixed) for software projects do not work. They can be made to work … usually by pressuring the team to work unpaid overtime, or pushing any disagreements through a costly change control process.

However, in the strictest interpretation of the wording traditional fixed priced contracts don’t work.

On average, large IT projects run 45 percent over budget and 7 percent over time, while delivering 56 percent less value than predicted. Software projects run the highest risk of cost and schedule overruns.

McKinsey & Company

Over the last decade many Agile teams and consultancies have been experimenting with different styles of contract. This includes Time and Materials contracts, and Jeff Sutherlands Money-for-nothing-change-for-free. Craig Larman and Bas Vodde wrote a great introduction to Agile contracts as part of their second book, Practices for Scaling with Lean and Agile Development. It’s available online at AgileContracts.org

It’s a terrific read but unfortunately it doesn’t present a contract or sample contract clauses because …

… Copy-paste is a real and present danger among lawyers and sales people, who—instead of grasping the underlying domain-specific principles (such as agile or lean principles) embodied in contract language—simply copy-paste clauses to draft new contracts.

Craig Larman and Bas Vodde, AGILE CONTRACTS PRIMER, PART 2: COMMON TOPICS OF AGILE CONTRACTS, Why No Specific Contract-Language Examples?”, Page 18. Tweet

Larman and Vodde’s book was published in 2010 and yet I still find myself in discussions with teams, management and companies over alternatives to fixed priced contracts.

My favourite type of contract is an Incremental Contract, but commercial examples of Incremental Contract are few and far between. In order to address this, I contacted a commercial lawyer and ask that they draft up a contract specifically for Scrum projects. This contract was written for Australian use here in Australia.

There are two versions on the contract, both of which you’ll find below. The first versions of the document is annotated to make it easy to understand. And, the real contract follows immediately afterwards. You are welcome to download these documents and use it at your own risk.