Agile contracts

Agile Contracts

Are agile contracts necessary?

Yes, even if the German Civil Code (BGB) does not know this type of contract.

The classic types of service and success based contracts (“Diens- und Werkvertrag”) provided by the German Civil Code (BGB) are proving increasingly unsuitable in practice for solving projects of a complex nature, in particular for the development of software and products for new markets. Agile methods such as Kanban, Crystal, Extreme Programming and last but not least the Scrum concept are gaining ground.

The success based agreement („Werkvertrag“) of the BGB with its underlying "waterfall methodology" is not suitable, because the customer does not specify the exact project goal before the start of a complex project - especially due to its complexity or only for reasons of time or cost - and may even dispense with any preplanning (no obligation and requirement specifications). The customer rather relies on the ability to work out the requirements step by step in the project and to adapt them flexibly.

The simple service agreement („Dienstvertrag“) does not qualify for complex projects since the customer does not have the sufficient know how to guide the supplier through the project with the help of his instructions, be it for complexity reasons or be it for lack of sufficient professional specialization on the customer´s side.

The agile contract is necessary for projects that are subject to constant adaptation in essential aspects (requirements, actions, functions, participants and therefore deserve to be qualified as complex) and in which the parties want to make these adjustments on an equal footing with the help of one of the above-mentioned methods (usually scrum). Risks thus become manageable for both parties for the first time. In practice, however, not all project parameters are handled as "agile". Even in the case of an agile project, certain parameters are often fixed, such as the project deadlines and the budget ("agile fixed-price contract").

The agile contract is therefore ideally suited for those projects,

  • which are too complex for any (detailed) advance planning
  • where no sufficient time is available for any advance specification and advance planning („time-to-market“)
  • where it is evident that major project parameters may considerably change during the term of the project („rapidly changing parameters“)
  • which may be realized incrementally with partial results and milestones that build up on the preceding increments and allow an empirical project management

and for those parties

  • that have employees, cross-functional teams and an organization who are trained in agile methods, even better certified in these methods, and experienced in its application
  • that bring the right “mindset” for this type of co-operation and that are capable of evaluating the velocity and productivity of its project team which is required for a reliable estimation of expected efforts (either for entire project or single sprints)
  • who have the know how to draft an agile project contract which requires an individual distribution of contractual risks that materially deviates from the types of contract historically envisaged by the German Civil Code (BGB)

Agile contract opportunities

Agile methods mean flexibility

  • The customer saves costs and time consuming pre-planning and specification processes
  • Changing and moving complex parameters (changing requirements, changing market and competition environment) will be identified by the parties and by their mutual agreement considered and recorded (backlog) in the project, become hereby controllable and do not further conflict with binding time lines and project budgets
  • Well experienced parties may also adopt the respective agile method to the specific needs and skills of their respective organizations and project teams

Agile processes mean acceleration

  • The cancellation of any pre-planning and specification processes allows a fast and short-term start of the project
  • The supplier works in close co-operation with the customer which means that any potential misunderstandings may be avoided or clarified promptly
  • The constant response and feedback that a supplier receives from a customer during the project avoids the risk that a supplier takes the wrong track, that the project results turn out to be of no use for the customer and that the wrong track will have been detected too late, i.e. shortly before project end, in case of a contract for result („Werkvertrag“) very late as part of the acceptance procedure

Agile methods provide transparency and control

  • The customer will be continuously informed about the current project status
  • Both customer and supplier at all times have an overview and keep control over the project (in regards to the degree of project realization and consumption of budget)

Agile processes increase quality and provide competitive advantage

The incremental approach that is part of each of the agile methodologies as well as its feedback processes („sprint planning meetings“, „daily scrum“, „sprint review“ „retrospective“) allow that all experiences that have been gained by the parties in the ongoing project may be considered within the remaining term of the project. Only those items will be realized which are covered by the budget and that deliver business value to the customer.

The short communication between the parties make it possible to complete the project faster which again provides a competitive advantage (time-to-market).

Agile methods promote an efficient consumption of resources and minimize risks

Those parts of the project (increments) will be realized first that are the most important ones for the customer and that deliver to him the highest business value. Thus, major parts of the project results may be tested by the customer long before the project end, in the best case even used by customer in operative mode long before the project end.

This early operation and suitability testing of increments and partial project results promote an efficient consumption of project resources and help reduce risks of complex projects.

Agile contracts risks

Agile contracts risks

Co-operation problems may escalate to a project termination

The strong cooperative approach of agile methods are on the one hand source for their strength, on the other hand, however, may be the source for their weakness and the trigger for project risks. The execution of simple service and success based contracts of the BGB („Dienst- und Werkvertrag“) mostly require less cooperation than agile contracts, specifically less co-operation that is founded on mutual understanding and agreement: The simple service contract (“Dienstvertrag”) gets executed through unilateral instructions issued by the customer; in case of a success based contract (“Werkvertrag”) customer prescribes the expected result and supplier promises its autonomous delivery on success basis.

The close co-operation required in agile projects may suffer from or completely fail due to many personal reasons, due to an insufficient project management or due to missing or deficient experiences in the team regarding the proper application of agile methods.

Risk prevention is done by preparing and adapting the corporate organization, by staffing and selecting the project teams with due diligence, hereby merging experience and personality. Of risk preventing nature are the processes of the agile methods itself which may be flanked and supplemented by additional contractual instruments such as certain escalation and mediation processes involving higher management level or board members.

Setting up the co-operation incorrectly may lead to an illegal form of body leasing

In case the co-operation which in fact is indispensable for an agile project gets set up and is being practiced incorrectly (no clear separation between the project teams, missing definition of the instruction channels) this may create avoidable risks of an illegal body leasing (violation of the German Act on Assignment of Employees - AUG). In this respect, the agile project creates higher risks under AÜG aspects in comparison to ordinary service and work contracts due to the intensity of the required cooperation.

Risk prevention is achieved not only by the correct contractual design of the processes, but also by implementing them in day-to-day cooperation in accordance with the AÜG.

Use of unsuitable contract templates may create avoidable risks for an agile project

If an agile project encounters an unsuitable contract, unnecessary risks for the success of a complex project are created. In case a customer - who wishes to develop via „scrum“ and wishes to provide the „product owner“ - insits on a success based contract (“Werkvertrag”) with a fixed pricing, then conflicts with supplier are pre-programmed. In such a scenario a supplier is being forced to promise a fixed price on a success basis for a delivary which may be changed by a customer´s “product owner” at any time during the project.

Risk prevention is carried out in this respect by means of an individually designed agile project contract, which has to differentiate itself from the fundamentals of the service and work contract (“Dienst- und Werkvertrag”).

Agile contracts: Contractual Drafting

The agile contract therefore differs considerably from the contract types of the German Civil Code, such as the service and success based contract („Dienst- und Werkvertrag“), and has to set priorities, which are partly completely foreign to these contract types:

Conflict-free contractual integration of an agile method

The respective agile method (scrum, kanban, crystal, extreme programming etc.) is the outcome of many years of practical experience of teams driven by their ambition to successfully conclude projects of complex nature.

The agile contract therefore relies on the most appropriate agile method, incorporates it in the contract, but must not come into conflict with it. The agile contract may at most make the legal additions or clarifications necessary from the point of view of the respective law applicable to the project contract, such as e. g. adaptation to establish AÜG conformity and clarifications on the binding nature of the decisions of the participants.

The agile contract has to respect in particular the roles of the project participants (product owner, scrum master, scrum team), project tools (backlog) and the processes (bodies, meetings, documentation procedures) specified by selected agile method.

Contractual stipulations securing the co-operation

The respective agile method requires substantial efforts of co-operation between the parties and many contributions from the customer´s side and supports this by establishing related processes.

These processes must be supplemented in the agile contract by additional contractual escalation and mediation procedures with related decision bodies which procedures must work fast, efficiently and in parallel to the project progress without delaying it.

The agile contract can provide for a phased approach (pre-project) to provide the empirical basis for a solid assessment of team productivity and the expected effort and costs (of the entire project or single sprints).

Contractual stipulations aimed at a fixed budget and a binding time schedule

Meeting the budget and time schedule is not only a commitment which the supplier must meet in an agile project, other than under a German service or success based contract (“Dienst- und Werkvertrag”).

The agile contract commits the customer to measures which help meet the budget and time schedule, e.g. by proposing and agreeing to changes in the scope of deliverables (de-scoping, design to cost) or to the project specifications (re-specification), always provided the project continues delivering sufficient business value to the customer (money for nothing, change for free).

Contractual Stipulations on the estimation rules and fee models which are either cost or value oriented

The agile contract must provide for rules that define the way of estimating costs and efforts (e.g. by way of story points) as well as rules for creating budget transparency (e.g. burndown-charts).

The agile contract offers - in addition to a fixed price, guaranteed maximum price, time & material - the ideal basis for numerous alternative remuneration models, which can either be based more on the (estimated) project costs or on the benefit and advantages that can be realized later (guaranteed minimum size, risk share models, fixed price per sprint, payment according to productivity, pay per use etc.)

Contractual Stipulations regarding the project termination and exit

One of the biggest challenges the agile contract must meet are detailed termination and exit rules that are deviating from those rules provided by the standard German contracts („Dienst- and Werkvertragsrecht”) and that harmonizes with the applicable pricing model selected form those mentioned above.

Implementation? With LLP Law | Patent

LLP Law | Patent supports you

  • in your analysis and assessment of whether a project has the complexity and maturity to be designed with the means of an agile contract or whether it is to be implemented with the means of a typical BGB service or success based contract („Dienst- oder Werkvertrag“) which is supplemented by a contractual change request process
  • when drawing up agile project agreements, be it as an individual project or frame agreement or be it in the form of general terms and conditions
  • when tendering for agile projects or participating in such a tender
  • in the negotiation of agile development and project agreements, be it on the supplier or supplier side
  • in the ongoing legal support of project management (contract management)
  • training of your internal organization such as purchasing or sales for the introduction of agile contracts in your company

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