suitability of agile development in fixed price contracts

Suitability of Agile Development in Fixed Price Contracts

Building sophisticated web applications and software solutions that meet your business needs can certainly accelerate the growth of your business. However, there are a few things that need to be considered before starting a project. One way is to carefully select the development team that will do the job. Another aspect that must be considered before starting work is the development process. There are three options: Fixed price contract, Time & Material contract, and finally Retainer contract. We will begin by analyzing Fixed bid contracts as part of the blog topic.

What is a Fixed Price Contract?

A fixed-price contract is, as the name implies, are scope, time, and price contract that is agreed upon before work begins. These projects include inquiries and intensive research on customer’s requirements. Everything should be clear to ensure that the software development firm has a very clear idea of ​​the end product or deliverables. Wireframes can be very useful here as they will help you visualize the final product. The software house then creates its areas for evaluating technology, designers, developers, and other resources. Many factors must meet customer expectations. The customer is then presented with the scope of work required, duration, fixed price of the product, and a development plan.

What benefits do you get from fixed-price contracts?

Benefits of Fixed price contracts

1. Budget Allocation:

Fixed-price contracts are very helpful to the customers because this helps them allocate specific budgets. The customers need not worry about an increase in their budget. Any overruns in the money will be absorbed by the software development firm as they had accepted to work on the fixed price.

2. Low customer involvement:

Fixed-price software contracts require very little customer involvement. This is because the results have been agreed upon in advance by both parties. Such contracts are ideal for customers with little technical knowledge. It's also ideal for those who are short on time or prefer to work with their partners.

3. Predictability:

Customers who need to budget for development costs benefit from fixed-price contracts. Because they are assertive and predictable. Such contracts provide customers with a better picture of progress and make reporting easier.

4. Fixed terms:

Fixed price contracts provide customers with fixed terms that the software company must adhere to. Exceeding the term can result in a software house being fined.

What are the disadvantages of a fixed contract?

1. Marked-up prices:

Fixed-price contracts are usually expensive because the software development firm adds a buffer cost when they would give a quote. This could be a high percentage depending on the risk the software development firm is willing to take marks.

2. Inflexible scope:

Fixed price contracts do not create space to add new features or change scope. This is perfect when the client knows exactly what they want. However, with changing business requirements, the software development needs also change rapidly, a fixed bid may be unsuitable for the customer. It gets very difficult if the scope of the engagement is part of product development. The functionalities keep changing based on the changing customer’s needs.

3. Detailed scope:

The customer needs to make a detailed needs document. This document should outline all the functionalities that need to go into the end deliverable. The teams of the project should also be made. Sometimes, this could be difficult for the customer to make such a tedious document.

4. Improper communication:

Incorrect project requirements can result in the developer doing a lot of work which is ultimately useless. The risk of this faulty communication increases proportionately with the cultural differences between the customer and the software house.

As we see, Fixed bid engagements have both pluses and minuses Fixed Bids give the customers peace of mind on the cost. However, the same Fixed Bids give the inflexibility to change the scope as per the changing needs. Hence we would need to see how we can incorporate the flexibility into a Fixed Bid contract. We would like to introduce a concept - Agile Methodology.

Let us discuss what an agile methodology is;

An agile methodology is a project management practice that promotes a collaborative, iterative, and step-by-step approach to project management. It is designed to be flexible as it assesses your initial needs and those created by future changes.

As agile, various cross-functional teams work together on different compilation iterations, with an emphasis on more personal interaction and less formal documentation. In agile development, an iterative approach or continuous improvement is employed. This means repeating the process until the desired result is achieved.

The idea is to develop the first functional version of the product components. This version is not meant to be perfect, rather it is used by users to test it in real-life conditions and then improve it. This way you can spot any mistakes or unmet needs as quickly as possible and fix the situation.

What are the Advantages of an Agile Methodology?

Advantages of agile methodology

1. Improved quality:

Using an agile methodology, teams can divide projects into sprints and work together to produce high-quality results. This method allows the team to deal with common issues such as cost management, scope constraint, and failure to meet deadlines. Also, there is a testing phase for each task, where the team can quickly identify and solve problems to avoid long-term negative consequences.

2. Speed and flexibility:

The second advantage of agility is speed and flexibility, all credits to the Scrum framework. The Scrum Method was originally developed for software development teams and their technical projects. Today, however, it can be used for a wide variety of projects, especially in marketing.

Scrum is one of the most common agile methods because it can be set up very quickly. Also, it is based on an empirical approach that allows self-organization creating room for change as your project grows.

3. Real-time visibility:

Another advantage of the agile approach is the transparency of each project with frequent exchanges with customers. This allows them to feel more involved and to ask for change as the project progresses. Also, the team involved can show clients their progress along with the obstacles they face.

This creates a relationship of trust and cooperation between the team and customers and can increase customer satisfaction and higher business value.

4. Control costs:

Flexible methods can also be used to improve cost control. After each stage, the team reviews the budget as decisions are made in the future. You then decide whether you want to continue, suspend or cancel the assignment or even the project itself.

This is an important part of project management because the team can easily understand the cost of each function, which is then factored into strategic decision-making.

Now that we have seen the advantages of using an Agile Methodology.

How can we spin an agile methodology into a Fixed bid project?

A Fixed bid works on three main pillars as discussed above. They are Scope, Time, and Cost. A change in one variable will cause a change in the other two variables. However, we attempt to freeze the three pillars in a Fixed Bid project. So, we will not be able to make any changes to any of the three.

So, how do we incorporate an agile element in this?

The traditional fixed bid project depends on the scope as the main variable based on which the time and the cost is frozen. So, instead of scope or specifications that determine the time and the cost, let us freeze the fixed bids based on User Stories.

We will now discuss what a User Story is

A User Story is one of the main elements of the Agile methodology. They are the smallest piece of work that represents a value to an end-user. The user stories can be delivered during a sprint.

The focus of a Fixed bid is the scope of the engagement. However, the focus of the user story is to put the end-users in the center of the conversation. The product functionality is captured from the end-users perspective. Therefore, developers get a better understanding of what they are building, who they are building it for, and why they’re building what they are building as functionalities.

Let us take a few examples of User stories when building an e-commerce application

  • As a user, I should be able to load my credit card information into my account so that I don't have to enter that every time I make a transaction
  • As a user, I should be able to keep selecting a variety of products and finally make a purchase using my credit card finally
  • As a user, I should be able to divert my purchases to multiple addresses.

Can the user stories function in isolation? It will be difficult to use only user stories as a way to lock a Fixed Bid project. We will need to use Acceptance Criteria also. What is the acceptance criterion?

A few examples of Acceptance criteria are:

  • The user must see multiple products and should be able to do multiple selections
  • The users can browse a variety of information about the products
  • The users should be able to use at least 10 types of payment gateways.

With the User Stories and acceptance criteria, we can estimate the total points that it would take for the project. We can estimate the cost and the time once we estimate the points it will take.

How do we estimate the time?

The time taken to deliver the project will be based on the projected velocity. The velocity will be based on the time that the team has taken to complete similar projects in the past. The tasks that need to be done depending on the number of activities we would need to complete in our iterations. This also includes the clients spending adequate time with the development teams. The project will be completed faster if the client spends more time with the team.

Depending on the team size, we will be able to achieve a specific velocity. Let us assume we are able to do 10 story points per 4 weeks. The estimate to complete stories may change because of multiple unknowns that may come in the user stories. So detailed documentation is important for us to catch the user stories.

The client may either want the project to be completed faster or might want a set of functionalities to be done by a separate time. So, we use the estimation of the functionalities delivery based on the user stories, time is taken per iteration, and the velocity. We can expand the team to complete these user stories on time if we are unable to complete them based on the estimate.

The client will also be able to determine the nice have Vs must-have functionalities. This situation is applicable when there is a deadline but the client knows that we will not be able to deliver all the functionalities.

So, in case of changes in scope, we will have to look at the total user stories and the time spent so far. We can then look at calculating the time available and can determine how many user stories we will be able to develop.


Fixed bids have limitations but customers prefer fixed bids because of the certainties in time and cost. However, Fixed bids have limitations in terms of flexibilities. Hence, Agile Methodology must be used in Fixed bid projects to get the best of both worlds - Certainty and Flexibility.



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