This article originally appeared in the December 2002 issue of The Rational Edge E-zine on-line magazine, copyright 2002-2003 IBM and Max Wideman.

The Rational Unified Process (RUP) is a rigorous software development process advocated by the Rational Software Corporation.

The downloadable PDF file of the paper on this site is the one prepared by the Rational Edge editorial staff with the special assistance of Ms Marlene Ellin.

Published here June, 2003.

Introduction | Problems with the Traditional Acquisition Process | Keeping It Simple
What Does Contracting Involve? | The Vocabulary of Acquistion | PART II

What Does Contracting Involve?

As we have noted, in a traditional acquisition process, the legal terms of a contract drives the activity in a fairly rigid way. So typically, a lot of energy goes into reaching agreement on the terms of the contract. This presents another communication challenge, as contracts themselves are very flexible. They can be devised to reflect any number of variables, such as:

  • The degree of definition for the thing to be delivered (i.e., the scope).
  • The type of product, whether tangible as in a good, or intangible, as in a service or a product such as software.
  • Safety and liability considerations for the product in use.
  • The urgency or specific timetable for product delivery.
  • The price to be paid upon delivery of the product, as well as financial incentives or penalties tied to specific benchmarks.
  • The degree of control to be exercised by either party to the contract.
  • The degree of tolerable risk, internal and external, and who should assume which risks.

Part III of this series, "Working with Traditional Contracting Practices," will explore these variables in greater detail.

Modern contracts for software acquisition should reflect the notion that initial plans for a software system are not monolithic and ironclad. The RUP focuses on an iterative approach and delivery of value as the most effective, efficient, and least risky means of developing software. Similarly, the PA processes developed and articulated by European governments have shown that iteratively acquiring and implementing system functionality is a much more effective approach than purchasing a complete system all at once, as in the "big-bang" model.

Software acquisition contracts should also recognize the high degree of variability in software "products." In fact, the actual software deliverable and its corresponding contract can fall anywhere along a continuum of a number of semi-interdependent variables. Figure 1 displays three major variables that I will discuss, along with several others, in a later article.

Figure 1: Major Variables Affecting Software Acquisition
Figure 1: Major Variables Affecting Software Acquisition

Given the highly variable nature of these deliverables, determining an appropriate form of compensation is a major factor in formulating the contract -- and hence the relationship between the parties.

The Project Management Institute's PMBOKĻ Guide describes the following traditional contract/compensation options.[7]

  • Fixed Price (or lump-sum) contracts. This category of contract involves a fixed total price for a well-defined product. Fixed-price contracts may also include incentives for meeting or exceeding selected project objectives, such as schedule targets.
  • Cost-reimbursable contracts. This category of contract involves payment (reimbursement) to the contractor for its actual costs. Costs are usually classified as direct costs (costs incurred directly by the project, such as wages for members of the project team) and indirect costs (costs allocated to the project by the performing organization as a cost of doing business, such as salaries for corporate executives). Indirect costs are usually calculated as a percentage of direct costs. Cost reimbursable contracts often include incentives for meeting or exceeding selected project objectives, such as schedule targets or total cost.
  • Time and material contracts. Time and material contracts are a hybrid type of contractual arrangement that contains aspects of both cost-reimbursable and fixed-price-type arrangements. Time and material contracts resemble cost-type arrangements in that they are open ended, because the full value of the arrangement is not defined at the time of award. Thus, time and material contracts can grow in contract value as if they were cost- reimbursable type arrangements. Conversely, time and material arrangements can also resemble fixed-unit arrangements when, for example, the units rates are preset by the buyer and seller, as when both parties agree on the rates for the category of "senior engineers."

The supporting text in the PMBOK Guide also describes six major procurement management processes: Project Procurement Management, Procurement Planning, Solicitation Planning, Solicitation, Source Selection, Contract Administration, and Contract Closeout.

However, these classifications are too limited; they reflect a traditional procurement paradigm, not a progressive acquisition approach. The challenge for RUP users is to devise a new approach that speaks to all players in terms they can understand, while at the same time remaining consistent with the RUP philosophy and methodology.

Next month, in Part II of this series, we will take a look at an actual acquisition process and discuss how to make it work in a way that is compatible with RUP recommendations for software development.

Keeping It Simple  Keeping It Simple

7. A Guide to the Project Management Body of Knowledge, 2000 edition. Project Management Institute (USA)
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