The purpose of this brief article is to explain the connection between documenting requirements and contract type. Recently I consulted with a firm eliciting requirements for a new product. In this case, an internal business analyst team was documenting the product requirements by consulting with appropriate stakeholders. The follow-on project intent was to outsource the work to develop the product in the form of a contract. The project sponsor asked me for advice and guidance on documenting the product requirements.
The project sponsor replied, “Why does that matter?”
As stated above, there are, in general, three types of contracts. The most popular is fixed-price. Its popularity is due to the buyer transferring all the cost risk to the contractor. Essentially, the contractor agrees to provide the product to the buyer at an agreed to cost; hence the name fixed-price. This type of contract protects the buyer from the risk of cost overrun in developing the product requirements as defined in the contract.
However, if the buyer really wants to control cost via a fixed-price contract, the product requirements must be precise. The buyer should be aware that the contractor may be relying on the lack of product requirement accuracy as a basis for additional profit. For instance, the contractor may agree or propose a low fixed-price (competitive bidding) to win the contract while expecting high profits for changes, rather than from efficiencies in developing items known stated and in the contract. Note, the buyer will most likely pursue the changes with the same contractor for continuity.
In cases where requirements are inaccurately described or worst yet, missing, the cost of covering these changes/add-ons are not covered in the fixed-price contract. To address these modifications, the buyer/contractor typically augments their business relationship with a cost reimbursement or time and material contract(s).
Note there are variations of these types of contracts such as Cost-Plus-Award-Fee, Cost-Plus-Incentive, Time-and-Fixed-Fee, and Cost-Plus-Percentage-of-Cost.[1]
Note that depending on the source the SMART acronym words may vary; see one reference below.[2] For example: Accurate instead of Agreed-Upon, Traceable instead of Time-Bound, and Relevant instead of Realistic.
Author: Mark Monteleone, CBAP, PMP, CSM, CSPO
Mark is the President of Monteleone Consulting, LLC and author of the book, The 20 Minute Business Analyst: a collection of short articles, humorous stories, and quick reference cards for the busy analyst. He can be contacted via – www.baquickref.com.
Mr. Monteleone holds a B.S. in physics and an M.S. in computing science from Texas A&M University. He is certified as a Project Management Professional (PMP®) by the Project Management Institute (PMI®), a Certified Business Analysis Professional (CBAP®) by the International Institute of Business Analysis (IIBA®), a Certified ScrumMaster (CSM) and Certified Scrum Product Owner (CSPO) by the Scrum Alliance. He holds an Advanced Master’s Certificate in Project Management (GWCPM®) and a Business Analyst Certification (GWCBA®) from George Washington University School of Business. Mark is also a member of the Association for the Advancement of Cost Engineering (AACE) International and the International Association of Facilitators (IAF).
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