Does the buyer take on more risk in an Agile project?

Posted on January 10th, 2008 in Agile by siddharta || 2 Comments

Gareth Reeves has an intriguing post where he compares Cost vs Risk in Agile projects. The summary of it is that in a Fixed Price contract, the vendor bears the risk should the project be delayed. On the other hand, agile projects are often Time and Materials contracts. In such projects the buyer takes on the risk of delay, because the buyer will end up paying more. Thus, the buyer takes on more risk in agile projects.

While I do agree with the above, it does not tell the whole picture. That’s because cost is not the only source or risk. There are other sources of risk in software projects. For instance, what if the project is never completed? Or what if the project delivered does not meet the requirements? These are huge risks, and the history of software development tells us that a large proportion of projects fall into these two categories.

By following an incremental delivery with frequent feedback and allowing the buyer to make changes to the scope on a frequent basis, agile projects vastly reduce the risk that the final deliverable will not meet the requirements.

By making releases with the most important functionality prioritised up front,  agile projects vastly reduce the impact should the project be terminated midway.

These are two huge sources of risk that an agile process can mitigate, and are good reasons why the buyer should actively ask for an agile process. Cost is not the whole picture, especially if we are talking about the risk the project may never be completed or may not meet requirements.

(On a side note, it is possible to follow an agile process with a fixed price contract as well. More on that later.)

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2 Responses to “Does the buyer take on more risk in an Agile project?”

  1. Jeff Anderson Says:

    I agree with your comments above,
    IMHO agile is an incredibly useful tool when mitigating risk within a fixed price contract. Both vendors and clients will get valuable feedback if the contract needs to be renegotiated, and this feedback can come very early on in the development lifecycle. In a waterfall style process, the need for contract renegotiations can often become very late in the process, and things can get nasty.

    Also, the majority of fixed-price contracts undergo some form of renegotiation (at least in my experience), having an agile, collaborative work environment is essential to making negotiation successful.

    I have posted on the subject of applying agile fixed-price contracts at http://agileconsulting.blogspot.com/2007/10/how-to-make-agile-development.html

  2. Gareth Reeves Says:

    Siddharta,

    Thanks for your comments on my post. I totally agree with your points. I am 100% behind the methodology. The point of my post was to raise awareness for how software buyers views the risk.

    Gareth

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