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How to contract for outsourcing agile development

Stephanie Overby | July 5, 2016
The buttoned-up contracting approaches used for traditional software won’t work for outsourced agile projects. Here’s how to implement different protections for agile development agreements.

Agile software development methodologies are hardly new. But figuring out a way to adequately contract for them in IT outsourcing deal is.

"Under traditional contracting approaches, there is an assumption that the development team can define, with some specificity, the ultimate 'thing' to be created supported by a detailed project plan and key milestones tied to client acceptance and financial payment triggers," says Derek J. Schaffner, attorney in the Washington, D.C. office of law firm Mayer Brown. "These concepts are very easy to memorialize in a development agreement due to the linear nature of a traditional software development approach that commences with detailed planning, followed by design, coding, testing and deployment."

Agile software, however, rejects traditional software processes in favor of more fluid development.

"There are no detailed project plans or key milestones because the client and developer continually evaluate and prioritize activities in short iterations or sprints," Schaffner says.

"An agile software development approach requires a leap of faith by clients who are accustomed to the formality and control of traditional software development."

However, there are contractual mechanisms that clients can implement to reduce uncertainty while still reaping the benefits of this more collaborative development method. talked to Schaffer about how to implement protections in agile outsourcing deals. What are the biggest challenges in drawing up contracts for agile development deals?

Derek J. Schaffner, Mayer Brown: An agile software development approach emphasizes unstructured, continuous interactions between the client and developer based on trust and understanding, which are difficult to memorialize in a contract. The biggest challenges involve creating a framework to take advantage of agile's creative benefits while balancing the need for client to have the software built in a timely manner for a fair price. So fixed price deals are out. How should clients approach pricing when developing an agile deal?

Schaffner: The agile software development [ASD] process more naturally fits a time and materials (TM) model, which understandably makes CFOs and CIOs nervous. After all, ASD requires a leap of faith - specifications are not clearly defined and there is a pricing model that motivates the developer to charge as many hours as possible.

There are variations of the TM model that can help control costs, such as capped TM on an iteration or project basis, a 'holdback' for each iteration that accrues but is not paid to the developer until the entire project is complete, and a pool or bucket of development hours paid on a fixed basis that the client can spend as it desires.

The TM model is more palatable due to its more client-friendly termination rights. However, there is a huge risk here: once the project is sufficiently far along, the client's desire to complete the project outweighs the flexibility to easily exit the project. This could create a situation for the developer to gouge the client towards the end of an agile software development project unless there is a cap on fees.


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