There's been much debate about the best type of contract for agile projects. Generally speaking, agile approaches require higher customer involvement in providing feedback on iteration deliverables, valuing items on the backlog and their continuous refinement. Therefore, due to their high product development involvement, customers may need to be more trusting of vendors they're using for their agile managed projects.
Since changes are an integral part of agile and projects need to adapt to them quickly, it makes more sense to plan in detail for the near term work while leaving out the details for items built in the longer term. This means that many items planned for the longer term may never get built while using an agile approach. This also means that re-estimating the remaining work from time to time is indispensable to agile.
Such levels of flexibility required for agile projects should reflect in the type of contracting option chosen. One agile contracting option is the "Fixed-Price Work Packages". In this type of contract, as each work package gets completed, the contractor can re-estimate the remaining work packages in the SOW, based on the latest information and risks. This gives the contractor and the customer a realistic estimate of the costs and risks involved in the upcoming work packages and an opportunity to reprioritize the backlog or to decide whether to continue with the rest of the project.
Thus, this type of contract enables the customer to retain control over the cost of the work packages and minimizes the contractor's risk to only the work package in progress. This, in one way, produces a win-win situation for both parties involved in the contract.
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