How to control the budget in an Agile contract?
Updated on 28.01.2022
The Agile method is often perceived as carrying an economic risk linked to the approach of working under contract. The flexibility in the definition of the object of the services would lead to a lack of budgetary security.
It is true that, unlike the IT contract based on the Waterfall method, the contract based on the Agile method makes it more difficult to fix a closed budget in the contract. However, the budgetary security of contracts concluded using the Waterfall method must be seriously qualified, because the slightest modification (change request) is a source of budgetary slippage. In the Agile contract, the precise definition of the final deliverable is open, which can lead to budget adjustments. As with any other contract, the Agile contract can be accompanied by budgetary control mechanisms.
How to ensure effective budgetary control during an Agile project?
For example, it is possible to set a maximum overall budget for the project. This definition can be based on the determination of a number of sprints to which a fixed volume of resources is allocated. To do this, it is necessary to estimate the number of sprints required to achieve the objective (in its initial conception). The overall cost is then determined in advance. The budget envelope is closed, and any variability and difficulties are then reflected in the scope of the developments that will be delivered at the end of the execution phase.
Another contractual technique sometimes used consists of providing a basic budget divided into tranches. Each one is activated by the completion of certain intermediate objectives of the project (milestones). This allows to:
- control the progress of the project in relation to the resources used, and
- stop the project if the progress is not satisfactory,
by limiting the committed budget.
In the same perspective of budget/results control, a penalty/bonus plan can be applied. This encourages the service provider to perform well, with the prospect of a bonus. The idea here is also to ensure that the project stays on track.
Finally, another (indirect) way to protect the Agile contract budget can be arranged via a specific unilateral termination option, in the event that a predefined objective is not reached (schedule, minimum level of product completion…). This makes it possible to terminate the contract, without having to demonstrate any fault on the part of the service provider. Indirectly, it allows to limit the budget loss when the project does not deliver the expected results.
The Agile method is sometimes wrongly perceived as a source of budget insecurity.
However, contractual arrangements can help to reconcile the flexibility of the Agile process with rigorous budget management.
If you want to know more about this subject, please visit the page dedicated to Agile methods!