Praise for Agile Contracts

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4 Praise for Agile Contracts Agile development is starting to become popular in Japan, though Japanese companies have used all in one contracts for the last three decades. In this movement, the new type of contract is a critical issue in achieving success in agile development. The concept and solution in this book is a step in the right direction. It will help Japanese companies and vendors transform development. The management change described in this book and in general in IT projects needs to advance toward the unique market in Japan. Naoyuki Miyahara, IT Manager, ABeam Consulting Ltd. It is a challenge to fully establish the positive aspects of the agile software development project within customer supplier relationships. This applies especially to highly structured business organizations.... This book closes all the remaining gaps and presents a methodologically sophisticated and comprehensive approach, as well as valuable practical experience and templates. At the same time it is technically sound and pleasant to read. All readers will benefit from the described methodology, especially the suppliers and the clients of such projects. A higher success rate of projects, partnerships, and sustainable ways of working are ultimately a benefit to all concerned. Steffen Kießling, Manager, Product Lifecycle Management, Bearing Point Agile software development methods have become the de facto standard in recent years.... This book should be required reading, primarily for buyers and sellers of software projects, in order to truly handle continuous end to end projects for agile. This book describes the appropriate interfaces and templates for the contract work, based on a cooperation model. The application of these approaches provides both parties with a decisive competitive edge over the (still) de facto standard form of contract. Dr. Stefan Klein, Head of Development, Infonova WILEY SERIES IN SYSTEMS ENGINEERING AND MANAGEMENT Andrew P. Sage, Editor A complete list of the titles in this series appears at the end of this volume.

5 AGILE CONTRACTS Creating and Managing Successful Projects with Scrum Andreas Opelt Boris Gloger Wolfgang Pfarl Ralf Mittermayr

6 Cover design: Michael Rutkowski Cover photograph: Michael Rutkowski Copyright 2013 by John Wiley & Sons, Inc. All rights reserved Published by John Wiley & Sons, Inc., Hoboken, New Jersey Published simultaneously in Canada No part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form or by any means, electronic, mechanical, photocopying, recording, scanning, or otherwise, except as permitted under Section 107 or 108 of the 1976 United States Copyright Act, without either the prior written permission of the Publisher, or authorization through payment of the appropriate per-copy fee to the Copyright Clearance Center, Inc., 222 Rosewood Drive, Danvers, MA 01923, (978) , fax (978) , or on the web at Requests to the Publisher for permission should be addressed to the Permissions Department, John Wiley & Sons, Inc., 111 River Street, Hoboken, NJ 07030, (201) , fax (201) , or online at Limit of Liability/Disclaimer of Warranty: While the publisher and author have used their best efforts in preparing this book, they make no representations or warranties with respect to the accuracy or completeness of the contents of this book and specifically disclaim any implied warranties of merchantability or fitness for a particular purpose. No warranty may be created or extended by sales representatives or written sales materials. The advice and strategies contained herein may not be suitable for your situation. You should consult with a professional where appropriate. Neither the publisher nor author shall be liable for any loss of profit or any other commercial damages, including but not limited to special, incidental, consequential, or other damages. For general information on our other products and services or for technical support, please contact our Customer Care Department within the United States at (800) , outside the United States at (317) or fax (317) Wiley also publishes its books in a variety of electronic formats. Some content that appears in print may not be available in electronic formats. For more information about Wiley products, visit our web site at Library of Congress Cataloging-in-Publication Data: Opelt, Andreas, 1978 Agile contracts: creating and managing successful projects with Scrum / Andreas Opelt, Boris Gloger, Wolfgang Pfarl, Ralf Mittermayr. pages cm Includes bibliographical references. ISBN (cloth) 1. Agile software development. 2. Scrum (Computer software development) 3. Computer contracts. I. Gloger, Boris, 1968 II. Pfarl, Wolfgang, 1979 III. Mittermayr, Ralf. IV. Title. QA76.76.D47O dc Printed in the United States of America

7 Contents Preface Acknowledgments ix xiii 1. Agility: What Is That? The Agile Manifesto of 2001 / Agile Development Based on Scrum / The Principles of Organization / The Process Model / Estimation in Scrum / Agility from the Perspective of Procurement / Agility from the Perspective of the Software Provider / The 12 Principles of Agile Software Development / Summary / The Missing Piece of the Puzzle The Problems with Traditional Fixed-Price Contracts / The Problems with Time and Materials Contracts / Something New: The Agile Fixed-Price Contract / Summary / What Is an Agile Fixed-Price Contract? Existing Approaches / The Agile Fixed-Price Contract / How Is an Agile Fixed-Price Contract Set Up? / Summary / 71 v

8 vi Contents 4. Sample of an Agile Fixed-Price Contract 73 Preamble / 74 1 Definitions and Clarifications of Terms / 75 2 Contract Scope and Hierarchy of Documents / 78 3 Usage Rights / 79 4 Transparency and Open Books / 79 5 Acceptance / 80 6 Obligation of Both Parties to Co-Operate / 81 7 Client s Obligations / 84 8 Escalation to the Steering Board and the Independent Experts / 84 9 Project Period / Warranty, Compensation, and Indemnification / Limitation of Liability / Contractor s Compensation / Force Majeure / Secrecy / Severability Clause / Place of Performance, Jurisdiction, and Applicable Law / 88 Appendix A: Commercial Agreements / 88 Prices / 88 Commercial Approach to the Project / 90 Payment Milestones / 92 Appendix B: Technical Scope and Process / 92 Requirements: Backlog and Vision / 92 Process for Development and Approval / 93 Changes to the Contract (Exchange for Free) / 95 Deliverables and Services / 97 Mechanism to Calculate Costs of Future User Stories / 98 Appendix C: 12 Principles of Cooperation / 101 Appendix D: Quality Standards Definition of Done / Tendering Based on an Agile Fixed-Price Contract Appropriate Tender Content for an Agile Fixed-Price Contract / Requirements for Tendering and Selection / Competition / Comparability and Transparency / 119

9 Contents vii 5.3 Tendering Steps with a Focus on Agile Fixed Price / Internal Goal Setting and Coordination / Preparation for the Invitation to Tender / Tender / Awarding of the Tender / Price Optimization Options / Project and Contract Management / Effort Inherent in the Tendering Process / Summary / Special Requirements for the Legal Framework of an Agile Fixed-Price Contract Adaptable System for Scope / Warranty and Damages / Schedule and Milestones / Path of Escalation / Obligations / Summary / Guideline for the Negotiation of an Agile Fixed-Price Contract Objectives of the Client / Objectives of the Contractor / Objectives and Bonus Payouts of the People Involved / Strategy for the Project and the Negotiation / Tactics for the Negotiation / Price Determination / Conclusion of the Negotiation and Project Steering / Conclusions / Advantages and Disadvantages of Agile Fixed-Price Contracts Detailed Analysis of the Pros and Cons / Budget Security / Requirement Flexibility / Detailed Requirements / Negotiating Costs / Estimate Security / Quality Risk / Price Elevation Tendency / Probability of Winning a Project Tender / Cost Risk / 161

10 viii Contents Security to Deliver a Project as a Whole / Acceptance Efforts / Pricing Transparency / Progress Transparency / Permanent Regulation / Securing the Investment / Summary and Overview / Conclusions / Toolbox for Agile Fixed-Price Contracts Stimulating Interest Before the Negotiation / Identifying Issues of the Other Party / Establishing Common Language and Experiences / Feature Shoot-out / The Black Swan Scenario / Workshop on Contract Setup / Reports and Metrics / KISS Backlog View / Focus: There Is a Single Goal! / Practical Examples Example 1: Software Integration in a Migration Project / Initial Situation / Contract and Procedure for Traditional Methodologies / Contract and Procedure for Agile Methodologies / Contract for Example 1 / Example 2: Creating a Software Product / Initial Situation / Contract and Procedure for a Traditional Fixed-Price Contract / Contract and Procedure for a Time and Materials Contract / Contract and Procedure for an Agile Fixed-Price Contract / Conclusions / 268 Appendix: Questions and Answers 271 References 275 Index 279

11 Preface How can you create a contractual framework for agile projects that provides the necessary security for buyers, sellers, and project managers? Agile methods for software development in particular Scrum are already in place. However, for both suppliers and buyers of information technology (IT) projects, one issue arises repeatedly: how to get out of the trap of fixed pricing without the disadvantages of time and materials contracts. How can you buy or sell agile software development? The answer is provided in this book: The agile fixed price explains the contractual relationships between clients and suppliers for agile-delivered IT projects. We bring to this work several years of experience in IT projects, working with teams and designing contracts, and have experienced the challenges of our customers from different perspectives. We have discussed, frequently and intensively, the approach to preparing the specifications, the contractual framework as such, and the invitation to tender. These discussions were based on the perspective of the project manager, key account manager, negotiator, and top management of the contractor, as well as on the perspective of the client s procurement and top management, or from the perspective of a coach for the project implementation. We know most of the pitfalls of traditional IT projects delivered according to the waterfall method, and we know how agile management frameworks reveal these pitfalls while simultaneously demonstrating new and successful approaches. Being able to define the scope or subject matter of a contract in detail, especially at the start of a project, is one of the biggest challenges for conventional ix

12 x Preface fixed-price contracts. Alternatively, many people use time and materials contracts to maximize the benefits of Scrum for project implementation, which is quite suitable from a development perspective. In IT projects, it is unfortunately not just about a development department feeling comfortable with the way work is done; there are other requirements to consider. Thus, to get an internal go-ahead, it is usually necessary for the client to fix the costs during the business case analysis. If an IT project were ordered based on time and materials, a firm would need to assume a lot of the project s risk. Jochen Rosen, IT director of A1 Telekom Austria AG, highlighted another aspect in an interview with us in April 2012 on the topic of conventional contract types in projects delivered with agile methodology: Companies have learned in recent years the value of the positive aspects of the agile development and project approach, and they are actively using the implicit benefits for end users, departmental organizations, and the IT organization. Traditional implementations using Scrum are mostly based on time and materials related contracts. The IT procurement, accounting, and IT organization were thus often facing the challenge to present the iterative procedure and the stepwise enhancements that were achieved, in a form to fulfill capital expenditure criteria. The agile fixed price, which sets a fixed price for a large project while not yet even describing the exact amount of detailed scope, can be the solution here, so that Scrum can also play its part in large IT projects! With the agile fixed price, we are introducing a new concept in the world of IT contracts. The agile fixed price solves the alleged contradiction between fixed-price and agile development on the basis of a suitable commercial and legal framework. The evolution of traditional fixed-price contracts is discussed in detail in the following chapters and explained by means of practical examples. We wish to move a step beyond what has occurred previously in the literature related to the preparation of contracts for Scrum or fixed-price contracts: for example, using function points. In this book we describe the entire framework and most of the problems it would be presumptuous to say all that exist in large IT projects. Different groups of readers will bring their own focus. IT procurement representatives will realize in the course of the book what role they play in the success of an IT project. We also show top management why the price of an agile project can be fixed while the scope of the project is not out of control. Since all IT projects are different, and IT project managers want to get practical hints, we present some brief examples as well as two very large sample project descriptions in the final chapters, to demonstrate the use in practice of this new type of contract. We wrote this book because we want to make the work of software development teams, buyers, and suppliers easier, so that IT projects can reach their full potential for success in the future. With agile fixed-price concepts, we offer

13 Preface xi a tool that allows you to create the conditions necessary for success in your organization. Andreas Opelt Boris Gloger Wolfgang Pfarl Ralf Mittermayr Vienna and Graz March 2013

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15 Acknowledgments To write a book in such a short time, in addition to busy workdays, house construction, children, partners, business trips, and presentations, is quite a challenge. The fact that we still managed to finish on time is due to the support of many people who could not take over all the work but did greatly facilitate reducing the workload. We would like especially to thank the following colleagues, clients, managers, and experts: Dr. Walter J. Jaburek, DI Jochen Rosen, Mag. Birgit Gruber, Dr. Stefan Klein, Stefan Friedl, Steffen Kiesling, and Alexander Krzepinski, who through their reviews of the original manuscript, critically questioned and thus sharpened our consideration of individual points. Their comments and suggestions have increased the quality of the book. In addition, they convinced us, each time in new ways, that a book on this subject was urgently needed. Their encouragement and positive words have helped us through all the stages, when sometimes it was not always easy to stay motivated. The graphics were created with the usual efficiency of our favorite graphic artist, Max Lacher. Thank you! Dolores Omann supported us in structuring and formulating the German blueprint of this book, and Carolyn Bompard displayed her good soul in spending a summer inside doing translation work instead of enjoying the nice Austrian summer! Thanks! Kari Capone displayed a lot of patience and creativity in unraveling our fascinating sentence structure and formulating it clearly. Without this help, the book would not have been so concise. We would also like to thank Horst Mooshandl, Elmar Grasser, Gerald Haidl, Matthias Schranner, and Markus Hajszan-Meister for valuable discussions on agile software development and agile fixed-price contracts. They have xiii