The fundamental essence of contracting is as old as our species. Humans have progressed and evolved over the course of millennia through negotiation and collaboration, building communities and agreeing terms of engagement. While the formalisation of contracting as we know it today began to take shape in the middle ages, influenced by both Ancient Greek and Roman philosophies, it was the twentieth century that ushered in the era of ‘traditional contracting’ – that is, agreements that are fixed in price, and fixed in scope.
Industrialisation and globalisation are perhaps the two phases of history that have had the biggest impact on formal contract practices, as international legislation has evolved to build protections for specific classes into contract law. However, it is the structure of ‘traditional contracting’ that creates the fixed scope. This approach purposefully creates inflexibility, requiring that each contracting party adhere to clearly stated obligations and duties, or risk incurring significant commercial damage or financial penalty.
The world continues to change, though, and so contracting approaches are changing along with it. We are seeing a rise in Agile Contracting in direct relation to the increasing acknowledgement of global uncertainty, and this is having a big impact on the international business marketplace.
What is Agile Contracting and why is it important?
Agile Contracting is exactly what the label suggests – contracting that is responsive and flexible; that is able to move quickly and easily. While the concept reflects the continued evolution of contracting, its name is taken from an approach that originated in the field of Project Management – particularly in software design – defined as the segmenting of processes into shorter phases, with agreed review points, and scope for change. Agile Contracting, then, is the process of adopting these Project Management principles for the purpose of formal agreement.
While traditional contracting emphasises penalties for non-compliance, Agile Contracting emphasises collaboration. This collaborative approach extends beyond the initial process of the negotiation of terms, and instead features throughout the contract lifecycle, with agreed reassessment phases and commitments to adaptation written into the terms and conditions. Agile Contracting is the proactive acknowledgement that changes to plans and circumstances are, in fact, likely. It is the difference between embracing flexibility and trying to legislate against it.
With this in mind, we can see that the Agile Contracting approach is important in a global marketplace that is facing severe economic fluctuation caused by sweeping political change, worldwide health emergencies, and the effects of climate change. As businesses around the world come to realise that scalability is the key to commercial survival, Agile Contracting is on the rise, and is quickly becoming the dominant approach to agreements and commercial relationships within business. For this reason, there are three main types of Agile Contract, becoming increasingly commonplace:
- Incremental Delivery – This type of contract divides the schedule of work into clearly defined periods, each followed by an evaluation and opportunity for renegotiation. It is especially useful for software development or similar technological projects because it lends itself structurally to the design, building, and implementation processes. Typically, incremental delivery contracts will prioritise the most valuable elements of the project, and then allow for additional features and development. This means the emphasis is on collaborative improvement and refinement, rather than the strict enforcement of a rigid timeline.
- Target Cost – This type of contract builds flexibility around profit and loss, or penalty and reward, through the equal distribution of both. It requires the contracting parties to agree a final price for the delivery of whichever goods or service is needed. This price is determined by a number of factors, including the overheads of the supplier, the actual cost, and the level of risk the supplier may encounter. If the supplier delivers below the final price, the savings are shared between parties; if the supplier exceeds the final price, the additional costs are shared instead. The mechanism of this type of contract works through the equal distribution of risk which, in turn, incentivises both parties to agree the lowest possible target cost, and then work together to create shared savings rather than shared financial burden.
- Time and Materials – This type of contract is the simple agreement of the amount a customer will pay a supplier, based on the time the supplier has spent and the materials they have used. The emphasis is on the building of long-term collaboration, which is the incentive for the supplier to work in a cost-effective manner. It is the way in which the delivery schedule is phased that creates flexibility in this contract, and this often gives rise to the contracting parties agreeing a cost cap. The cost cap stipulation does limit flexibility to an extent, but this remains an Agile Contract in relation to the traditional contracting model.
While the need for scalability in business is a big reason for the rise in Agile Contracting, it is also happening in response to the fact that this approach effectively reduces legal disputes. By having the opportunity to reassess and renegotiate written into the fabric of the agreement, there are less instances of costly breaches. With more stringent performance monitoring being a central part of the Agile approach, potential areas of contention and progress bottlenecks can be addressed in a proactive fashion, as opposed to responding after the effects have taken hold.
Points to consider in Agile Contract creation
The process of contract creation has its bedrock stages, including the identification of need, the setting out of goals, and the agreement of price. With its more proactive approach, Agile Contracting requires the consideration of more specific points in contract creation, to ensure that the opportunity to create flexibility is maximised.
- Understand your project/relationship in terms of outcomes – By focusing on results, outcomes and goals, rather than the process by which they are achieved, the contract leaves room for adjustments to be made in response to changes in circumstances. Traditional contracting is built around the mitigation of risk by setting out the scenarios that all parties seek to avoid. Agile Contracting mitigates risk by acknowledging those scenarios will occur and allowing all parties to work together to accommodate that, in pursuit of agreed goals.
- Communication – It is crucial during the creation of Agile Contracts that all parties communicate effectively. This means the consistent provision of honest and clear feedback during all phases of the contract lifecycle, and an entirely collaborative approach to negotiation, renegotiation, and review, for the purpose of bringing customer and supplier into alignment. Agile Contracting requires a particular level of openness and accommodation from all parties, as each must be receptive to constructive criticism in order to make a deal. Communication is the key to a contractual relationship that is productive, as opposed to combative, obstructive, and adversarial. While creating the Agile Contract, schedules and methods of communication must be planned and detailed, in order for the agreement to be successfully executed.
- Transparency – While this relates directly to communication, it also relates to the general, overall approach that is required for Agile Contracting. Transparency is needed in communication, and in all aspects of the contract lifecycle. This means accountability within your own organisation and Contract Management System, as well as an agreement to maintain the same from the other parties. This commitment ensures that conflict and disputes are minimised, and the productivity and effectiveness of the contract is optimised.
The software solution
With the concept of Agile Contracting having been adopted from Project Management processes concerning software development, it is inevitable that software would be the solution to the challenges of Agile Contract creation and management. While the largely static nature of traditional contracting could be tackled with methodologies more manual in approach, the fluid structure of Agile Contracts requires a more responsive strategy.
Contract Management Software, such as Symfact, is designed with flexibility in mind, and incorporates a number of features that specifically support the creation and management of Agile Contracts.
- Permission-based access – Cloud-based Contract Management Software platforms allow for authorised personnel to securely access and work on contract documentation from any internet-connected location, through any web-enabled device. This enables close collaboration between contracting parties throughout the creation of Agile Contracts and continuing through the contract lifecycle.
- Automated workflows – By automating workflows, Contract Management Software removes from personnel the task of manual project schedule management. Once the workflow has been defined, the documentation is moved through the process – arriving with the right person at the right time, with notifications and alerts to prompt required actions. This means that, throughout the contract lifecycle, review and reassessment deadlines are met by all parties, and close collaboration is further supported.
- Customised reporting – The consistent and stringent performance monitoring needed for Agile Contracting is facilitated by customised reporting. This feature incorporates a high degree of automation, and delivers accurate, actionable data, which can be distributed through automated workflows in support of close collaboration between parties.
As we head into 2021 and our business communities face the continued uncertainty caused by Coronavirus, Brexit, the transition from LIBOR to SOFR, and countless other challenges, the rise of Agile Contracting is a significant development in the field of Contract Management. It is the ideal option for scalability and efficiency in any organisation and is easily facilitated through Contract Management Software. Call Symfact today to arrange your free demonstration.