Agile contracting: Managing incentives under uncertain needs

Agile contracting: Managing incentives under uncertain needs


In many software development projects, the functional and technical requirements change over time due to changing needs, designs, technologies, and market trends. To respond to these changes quickly, firms often use agile methodology to execute their projects, wherein projects are modularized via a set of independent substeps or "stories" that are developed in short time frames or "sprints". We analyze agile contracting between a buyer and a supplier and show that the "Time and Money" type of contract, popular in the industry, is suboptimal. These contracts do not fully capture the effects of evolving uncertainty and story-level complexity. Our work shows that firms should categorize project stories based on their need-risks and complexity, and then use a tailored contract (i.e., assigning a different hourly rate) for each category of stories.


Looking Carefully at Agile: Managing Costs with Complexity and Uncertainty.


POM is UTD and FT-50. The paper is available at