How to Improve Agile Project Management Under Time and Materials Contracts

Agile project management in software development has proven to be one of the most effective methodologies. When paired with a Time and Materials (T&M) contract, which allows for flexibility and adaptability, Agile can be particularly effective in managing evolving scopes. However, without careful oversight, the dynamic nature of Agile combined with the open-ended nature of T&M contracts can lead to challenges, such as uncontrolled budgets or misaligned expectations. 

Let’s explore some actionable strategies I’ve adopted and improved through years of managing Agile projects under T&M contracts.

The Challenges of Agile

Initial Estimation vs. Iterative Development

One of the greatest challenges in Agile is managing expectations around initial estimates. At the outset, teams might estimate, for instance, that the product will be completed in five sprints. However, iterative development introduces inevitable uncertainty (or as one of my team members calls it, reality), which is a natural byproduct of refinement processes and continuous learning.

As new challenges emerge and requirements evolve, the number of sprints—and consequently, the costs—can increase. This often results in budget creep, especially under a T&M contract. Successfully managing this uncertainty requires setting realistic expectations from the start while regularly revising estimates based on sprint reviews and the project’s evolving needs.

User Story Writing: The Risk of Misinterpretation

Agile development relies on the creation of user stories—small, manageable chunks of functionality that describe what the user needs from the product/system/processes. Typically, business analysts draft these stories in collaboration with the product owner. While the product owner’s vision is critical and ensures alignment with expectations, misinterpretations can still occur. A user story that seems clear may leave room for assumptions, leading to misunderstandings that can extend timelines and inflate budgets.

To mitigate this risk, active involvement in the user story-writing process is essential, especially when drafting acceptance criteria. Regular backlog refinement sessions, sprint reviews, and daily sessions are important for aligning the development team with the product owner’s vision and the definition of done (DoD) of every story— DoD refers to the agreed-upon criteria that must be met for a task or feature to be considered complete. Leveraging tools such as wireframes, detailed examples, edge cases, and well-defined definitions of done can significantly reduce ambiguity, minimizing errors and delays.

My Strategy to Mitigate These Risks

After several trials, mistakes, and pivots, and incorporating feedback from other project managers as well as best practices from PMI frameworks, I developed a strategy to maintain both budget control and adherence to Agile principles. Here's how I've managed to strike a balance between the two:

1.      Define the Paper Plane Version: Minimum Viable Product (MVP)

Start by defining the MVP, which I like to call the “paper plane version” of the product. This lean version includes only the core functionalities required for the product to deliver value. A good MVP focuses on validating whether the key features that provide value are designed and implemented correctly—not on perfecting secondary aspects like user journeys or edge cases.

An effective MVP is a quick, cost-efficient way to test ideas and validate assumptions with stakeholders. It helps determine whether the product addresses the primary problem it’s intended to solve and aligns with business objectives. For example, if the product’s goal is to improve customer onboarding, the MVP might include only the essential tools for account creation and onboarding insights while leaving out additional features like profile customization.

I suggest using these questions to define the scope of the MVP:

·       What is the single most important problem the product solves? For example, when improving customer onboarding, define the key outcomes that indicate success. The Definition of Done (DoD) might include steps like account creation, email verification, and successful login.

·       What is the core user flow to solve that problem? Identify and streamline the key steps that need improvement.

·       Which features are absolutely essential for that core flow? Determine the minimum functionality required to complete the process.

·       What can be deferred to later iterations? Clearly mark 'nice-to-have' features in the backlog for future evaluation, ensuring ideas are documented for later iterations.

Focusing on the MVP first allows you to quickly gather feedback, refine the concept, or pivot if necessary before making significant investments in features that may not add value. This ensures development resources are allocated to what truly matters—delivering the right solution at the right time.

2.      Establish KPIs for Progress Monitoring

Once the MVP is defined and implemented, the next critical step is ensuring its success through measurable outcomes. This is where establishing KPIs becomes essential. Define Key Performance Indicators (KPIs) at the beginning of the project—metrics that assess both product performance (e.g., user satisfaction, product-market fit) and development progress.

For instance, a meaningful KPI might measure the reduction in the number of steps users need to complete a critical task—such as customer onboarding, as mentioned earlier. Another example could be tracking user satisfaction metrics like survey results or Net Promoter Scores (NPS) to gauge how well the product meets user expectations.

While t development-focused KPIs, such as cycle time, velocity, defect density, and points completed, are valuable, these alone can be misleading if the team’s efforts are not aligned with the project’s main goals. A sprint can seem successful on paper, yet fail to deliver the desired outcomes. This is why I recommend prioritizing KPIs that validate the product’s impact and the value it delivers to users over metrics that solely measure development efficiency.

By focusing on outcome-driven KPIs, you can ensure the product’s progress aligns with business objectives, guiding efforts to deliver measurable value in every iteration. 

3.       Escalate from Paper Plane to Glider: Iterative Refinement

After validating the MVP, the next step is iterative refinement—what I like to call moving from a “paper plane” to a “glider” and eventually an “airplane.” This stage focuses on adding incremental value by building and validating enhancements one step at a time. Each new feature or improvement should be tested and validated before full-scale development to ensure it delivers tangible value aligned with the product's objectives.

The decision for the next upgrade should be based on backlog priorities, which reflect a shared vision among stakeholders, the product owner, and the development team. Incorporating end-user testing processes, beta releases, or feedback surveys can provide insights into what works and what needs adjustment. Regular communication between all parties is important to ensure priorities address both business goals and user needs effectively.

This approach offers several benefits: it helps maintain strict control over the budget while enabling the team to deliver value in manageable iterations. By focusing on delivering the right features in the right order, the team avoids overcommitting to unnecessary functionality that could damage both the product’s credibility and its financial viability. Each improvement aligns with the overarching strategy, fostering both measurable progress and stakeholder confidence.

4.      Repeat Evaluation and Comparison Against the Baseline

The process doesn’t end with implementing a new feature—it requires continuous evaluation to ensure the product is evolving in the right direction. After each new feature or update, assess the product against the initial baseline and the KPIs established earlier.

If the product is advancing as planned and receiving positive feedback, this validates the approach and allows you to confidently proceed with refining or adding new features from the backlog. However, if the results fall short, it’s an opportunity to pause, reassess priorities, adjust the scope, or even pivot in a new direction.

This ongoing cycle of refinement and evaluation ensures that each iteration builds on the last. Regularly comparing progress not only maintains control over the project’s trajectory but also helps prevent budget overruns by identifying and addressing missteps early.

5.      Implement a Change Management Strategy

Resistance to change is a common challenge in many projects and products, but it’s entirely natural. To overcome this, I recommend engaging users early in the process, offering them opportunities to test and provide feedback. This involvement allows users to gradually adapt to the new system and fosters a positive shift in their mindset toward the product.

Another effective approach is to review and adjust current processes alongside product development, making the transition smoother. Identifying product champions within smaller user groups of end-users can also help advocate for the new system and facilitate adoption more effectively. However, selecting these champions requires careful consideration of their commitment and influence. Understanding whether they are early adopters, who embrace new changes, or natural opposers, who might require additional support, can significantly impact the success of the transition.

Ultimately, successful adoption and adaptation are not just about easing the transition, but also having a direct positive impact on ROI. The more effectively users embrace and adapt to the system/product, the greater the likelihood of achieving the anticipated value, ensuring a positive return on investment.

By prioritizing real end-users and fostering collaboration across all levels, you can create a change management strategy that minimizes resistance, ensures accurate feedback, drives smoother adoption, and maximizes ROI.

Conclusion

Agile development within a Time and Materials contract offers significant flexibility but requires disciplined management to prevent budget overruns. By defining a clear MVP, establishing and tracking relevant KPIs, and fostering iterative refinement, you can strike a balance between Agile principles and financial control. With a focus on delivering the right features—driven by feedback, aligned with business goals, and supported by effective change management—your project can stay on track, meet objectives, and consistently deliver value with every sprint.

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