Flexible Contracts – where the future is headed?

By December 4, 2015 No Comments

In a world of changing market trends, constant shift in the needs and priorities of the stakeholders, change in the desired business objectives are common. So, do the Fixed Bid projects or projects bound by traditional contracts really work in this scenario?

As a Business Analyst, often I receive a 100 page requirement document which makes me ask questions like “Do they need all this”. Sometimes, it may be needed depending on the size and complexity of the project. But, is it palatable and practical going through the entire document? With the project’s progress and stakeholder priorities, many requirements are bound to become redundant, obsolete and termed “Not required”. So, why the pain of documenting something that may be deemed as not required in future?

In fixed cost projects, the saga of change requests is never ending when the customer has changed priorities and changed requirements because the supplier and customer are bound by a fixed contract. It is impossible to document and list all the outputs (requirements) in the initial phase, at the time of finalizing a contract. In many projects, the requirements are listed and suppliers would respond to a RFQ. Once the supplier is shortlisted, the requirements are now a part of the contract. The supplier and customer are bound by this and are forced to build/implement a solution that may not address the changed scenario, all the while knowing that they are building the wrong thing. So, at the end of the project, they have collaboratively built something that does not address their business problems and the product has to be flushed down the drain whilst also having invested heavily on getting that built.

What do we need here? A real cultural shift! Where the customer and supplier focus on outcomes rather than outputs. This results in the customer gaining value for their investment and provides flexibility to the supplier to build an optimal solution which is cost-effective, quick and addresses the real business problem. This essentially means a contract between the parties involved that aligns well with the Customer Expectations and Supplier implementation.

How do we do this?

  • The customer and supplier get into an agreement called Master Service Agreement which details various aspects of the engagement like governance, goal of the project, implementation rates, project tenure etc…
  • The supplier in collaboration with the customer identifies a set of leading indicators which are short term indicators and are business outcomes, identifies the metrics to measure the output, and prioritizes each of these outcomes.
  • The highest priority outcome is now selected for SOTO (Statement of Targeted Output) which resembles a Statement of Work in traditional projects. As per the SOTO, The client commits to providing all information, infrastructure and access to the client details by a target date. Thereon, the vendor commits to deliverables by a target date. The SOTO involves two types of fees- Service fee and Bonus Fee. Service Fee is the portion that is mandated to be paid by the customer and Bonus Fees is only paid upon acceptable delivery.
  • The supplier identifies the various options to address the outcome. The client will be in the loop for the progress and a feedback loop every two weeks in in place to ensure that the supplier is building a solution to meet the outcome. This works well with the agile development model.
  • At any point in the project cycle, if the customer feels that the solution built will not solve their business problems, the SOTO is terminated and all fees till date are paid. The customer doesn’t have to pay for the work that is not done and is not held accountable as per the contract.
  • The supplier and Client can work without worrying too much about scope creep and should ideally only worry about the deviation to the objectives


Many US and Europe based firms and government departments are adopting this framework for a successful collaboration to achieve the desired business objectives. Essentially, the driving factor for the project and its success is the prioritized objectives of the business. This allows the vendor and the customer to remain focussed and work collaboratively to achieve the common goal.

We, at XVT Solutions believe that there is great benefit and value-add for our clients in this approach and that we can continue to deliver quality solutions and exceed client expectations. Being a change-ready organization, we are ready for such engagements with clients.

Tej KS
Business Analyst, XVT Solutions

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