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when to use traditional or collaborative contracting methods?

Martin West

We have modeled the relationship between predictability and the need to learn. This is used as the basis for deciding which contract model to use. I.e. determine which model best addresses the specific requirements for a project or set of projects.

We have outlined below 4 options. These are mapped in the charts below and discussed in terms of risk and conditions of use. The use of Small Batch size is modeled below. The context here is as a cadence for contracting and is not supported by fixed fee. 

 

                                                   

highest predictability - time and materials (T&M) OR fixed fee (FF)

  • conditions: high predictability and no critical learning or unknowns. These projects are highly repeatable and are probably under continuous improvement.
  • risk management: Given these dynamics, the customer and the vendor are managing the project risk effectively. If fixed fee or T&M are working stay with what you have. In theory, T&M would be better for the customer to avoid the risk premium.

                                                  

high predictability - fixed fee (FF)

  • conditions: Fixed fee can be effective for projects that are very repeatable and predictable across project life cycle. This is where learnings or unknowns are minimal.
  • other options: There is some customer risk that would be introduced with T&M so given the other conditions, this fits is better for FF. Collaborative contracting fits here but contracting on scope that is very highly predictable initially. 
  • risk management: There is growth in risk related to use of FF and large batches. This growth in risk is aligned to the increased need for project agility and learning. When the requirement for agility grows, the fit for a fixed fee arrangement makes less sense. The switch to smaller batches to accommodate learning need brings in the need for contracting collaboratively. 

high - medium - med-low predictability & need for learning – Collaborative contracting

  • conditions: Use collaborative contracting (CC) unless FF or T&M present less risk – see below
  • risk management: use collaborative contracting unless:
    • FF: the operational batch cycles (2 weeks) have the same risk level as the large batch cycle (full project). i.e. this project is so repeatable that there is no planning risk.
    • T&M: Your maximum planning horizon for the project is ~ 2 weeks. I.e. predictability is extremely low and the need to learn very high.
                                  

    predictability is extremely low and the need to learn very high – T&M

    • conditions: Small batches can be used to time-box work and provide predictability within time-box. Larger batches can be used to frame the contract.
    • risk management: Small batches can be used to time-box work and provide predictability within time-box. Larger batches can be used to frame the contract. While this has large and small batch components, this is not like CC. There is no joint commitment to overall budget and schedule, nor to operational batch budgets.

     



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