Pricing Model for the Agile Projects

Question from Services organizations usually is how to build an efficient agile pricing model.  Lawyers from the Supplier organizations, work with Lawyers from Customer organizations and build a exhaustive contractor agreement.  Here tried to elaborate on the four pricing models / options that are usually in practice from the Supplier point of view.

  1. Time and materials : This is one of most commonly used models and beneficial for the Supplier Organization. The pitfalls of this option is the fact that that it does not mitigate the risk of scope crepe,  in terms of project delivery. This can incur additional costs for the Customer and Customer may not have the the cost control with this this type of pricing model
  2. Fixed price : Gives the cost control to the Customer  and to the Supplier the ability to manage in a more efficient way the triangle (cost, time and scope ).
  3. Unit based costing: This is very much oriented in a bottom-up approach. It gives the ability to allocate a part of budget to a unit of delivery for example one can allocate a budget for a story , for a sprint,  for each iteration, etc. In terms of invoicing , Supplier can set up installments that are related to the unit based costing so that that is definitely the good choice from Supplier
  4. Target based costing : This  is more sophisticated and it has to be negotiated cautiously with the Customer, it’s this pricing model gives you the ability to share the risks and rewards between the Supplier and the Customer. Eg: Risk of the late delivery, encourages to deliver earlier by implementing incentives.

More details on Agile contracts read “if-one-needs-benefits-of-agile-contract-has-to-be-around-the-agile-manifesto-and-its-principles Part 1, Part 2, Part 3

In the agile development scenarios, to elaborate and to build a very efficient agile pricing model one have to choose and negotiate a win-win agreements between supplier and the customer to really share the risks and rewards. Maybe build tailored model with the combination of all four pricing models. But at the end of the day what is really important is and what you have to keep in mind is the agility –  delivering working solutions that are value to the business and also the one that encourages collaboration and win/win agreement between the Supplier and Customer.

Thank You.

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