Definition: The agile fixed price enables all project participants to adapt requirements (agility) during the course of the project within a fixed budget (fixed price).
Fixed-price contract model vs. agile fixed price
There are various price and contract models. The best-known contract model is the fixed price. This offers a high level of budget and order security: if the agreed budget is exceeded at the end of the project, the supplier pays extra. If there is still budget left at the end, the profit for the supplier is higher, as the customer pays the full price. The fixed price model is very simple and is often used for so-called waterfall projects, in which one project phase is completed after the other.
However, a major disadvantage of a waterfall project is that all requirements must be fully specified before the start of the project and cannot be changed during the course of the project, or cannot be changed so easily. The effort required to make changes to the contract is above average, as several subcontractors may have to be involved in redesigning the contract. More complex requirements may only be implemented unsatisfactorily.
Particularly in the case of complex projects, suppliers rarely have sufficient experience to estimate the costs 100% correctly. As a result, they run the risk of unforeseeable additional costs, which they pass on to the customer in the form of a "risk buffer".
This combination is therefore suboptimal for both parties and, in the worst case, can lead to project termination.
The agile fixed price also offers budget security. Agile projects rely on the mutual trust of developers and customers and their close cooperation. This takes the pressure off the project and gives all parties a greater sense of security. Changes to requirements are not a problem, but the basis of the agile project.
The close cooperation between suppliers and customers leads to an equal understanding of the requirements and the status of the project. There are generally no queries and iterations. Ultimately, this leads to greater resource, cost and time efficiency.
The following graphic shows the comparison and evaluation of the various price and contract models:
How is the Agile fixed price determined?
In order to define a fixed price framework, the customer and developer jointly make estimates about the business value of the project, risks, effort and costs. Boris Gloger also suggests this process:
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All parties meet and roughly discuss the main project goals, requirements and project requirements at an abstraction level (so-called epics). The developer and customer also agree on the legal framework.
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An epic is selected together and broken down to the level of user stories, which then serve as reference user stories. They are used to calculate the effort required for the entire project. A user story could be: "As a content manager, I would like to be able to upload images so that I can incorporate them into articles or pages." At this very granular level, developers can estimate much better how high the development effort will be.
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Now comes the test phase, in which developers and customers can test their collaboration: 2-5 sprints are planned with a duration of 1-2 weeks per sprint. A sprint is a development period for which the duration and project parts to be developed have been defined in advance.
Implementation already begins so that the customer always has a product to work with at the end of the test phase. At the end of the test phase, the customer and developer check whether the estimates from the beginning are realistic and whether they want to continue the project together. The fixed price framework is then contractually agreed and the distribution of risks is discussed. They also negotiate how costs are to be charged to the customer if the budget is exceeded and how to deal with extremely good work (through bonuses or similar).
You can find the full video of this process here: https://www.youtube.com/watch?v=YIGDOZx_3QE
Who is this method suitable for?
The agile fixed price or agile project methods are particularly suitable for complex projects where the predictability of costs and results is low. This is the case in the field of software development.
A certain budget framework is required within which all participants can operate. Compared to projects with simple requirements and known technologies, which can be offered at low fixed prices, agile projects are much more resource-intensive and tend to take longer. The big advantage, however, is that the customer always has budget security and the project can be canceled at any time, whereby the customer always has a functioning product.
Agile projects with an agile fixed price should only be carried out with experienced developers, as this minimizes the aforementioned uncertainty factor.
Further information:
Our internet agency from Stuttgart offers this method in agile projects. Get in touch with us!
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