The integration of goal-based or outcome-driven contracts with agile project management methodologies has become increasingly common, particularly in interactions between large corporations and their vendors.
While this trend may seem like a recent innovation, it’s just a new iteration of a long-standing challenge: balancing flexibility in doing a project (dealing with scope creep, fixing crises, and the like) with the financial certainty that fixed-price contracts provide.
The shift toward goal-based contracts (essentially fixed-price agreements under a new guise ) is primarily finance-driven. The reasons are clear: corporations aim to minimise scope creep and cost overruns.
As project managers, our role involves accommodating these financial constraints while delivering successful outcomes. However, agile methodologies, now the default expectation within many organisations, inherently conflicts with fixed-price agreements (which are better fit to the waterfall methodology).
So how do we reconcile these two seemingly incompatible requirements?
I have found several practical ways to make this work (rather than just saying “Use scaled agile framework (SAFe)” or some other boring reply):
1. Clearly Defined Initial Cost Boundaries
Initially, costs must be explicitly fixed. This non-negotiable stance appeases finance departments, preventing early-stage roadblocks. While we know additional costs might arise later, establishing a firm baseline from the outset is crucial. Once you have got the project started, you can get ready to handle extra costs with separate statement of work agreements, but managers and such can get on with these while real people get on with delivery.
2. Shifting Goal Definitions
A potential (though problematic) solution involves redefining goals as effort-based rather than strictly scope-based, that is, hire a vendor for a defined period of time with a certain number of people to do the job. Although appealing due to its simplicity, this approach may lead to compliance risks (e.g., IR35 concerns 1 ), particularly for smaller vendors, and can diminish vendor motivation as they know they will not be held to account for anything.
3. Breakdown deliveries into Smaller, Goal-Based Items
Another viable approach is segmenting the statement of work into smaller, individually priced items. This method simplifies justification of outcome and billing but can also result in significant administrative overhead and ongoing negotiations.
4. Categorizing Goals by Priority
A beneficial strategy involves dividing goals into mandatory and optional categories. Mandatory goals must be completed first, while optional goals can be adjusted or omitted to accommodate scope creep or unforeseen issues without compromising the fixed-price arrangement.
5. Internal Readiness and Client-Side Accountability
Implementing an internal readiness firewall can protect vendors from being unfairly penalised for client side delays or process inefficiencies. Clearly defined client-side responsibilities and associated SLAs ensure transparency and accountability.
Including explicit provisions for what occurs financially if these SLAs are breached helps maintain fairness.
6. Pre-Approved Contingency (Positive Change Budget)
Creating a “white-listed change budget” of approximately 5-20% of the total cost serves as positive contingency. Unlike traditional contingency funds viewed negatively, this budget is openly acknowledged, pre-approved, and requires minimal paperwork, making it much, much easier and less “finger pointy” to roll with a cost overrun.
7. Streamlined Escalation Pathways
Setting up non-confrontational, rapid escalation channels reduces friction. Both vendor and client teams should have clearly defined pathways for quickly addressing blockers without resorting to finger-pointing or aggressive tactics; this lets you behave far more in an agile way but within a waterfall-style contract.
8. Positive Incentives Rather than Penalties
Contracts should ideally balance penalties with positive incentives, rewarding early deliveries, high test pass rates, and other performance-enhancing milestones. This approach helps collaboration and productivity rather than defensiveness.
9. Separate Internal and External Retrospectives
Conducting internal retrospectives independently from vendor-involved sprint retrospectives can significantly reduce vendor frustration at fixing someone else’s issues while on a tight timeline and enhance internal process improvements. It allows teams to critically evaluate and address internal inefficiencies without placing undue burden on external partners.
10. Be Transparent
Finally, treating a Statement of Work (SoW) as an “outer fence” while operating internally through agile backlog management, fixed team capacities, and friendly releases helps prevent defensiveness, promoting clear, blame-free visibility of progress.
- This is a form of UK-based disguised employee legislation [↩]