In the world of IT projects, blown budgets and exploded timelines are a familiar story. While these overruns are partly explained by technology and execution factors, the very nature of the contract binding the client and the integrator plays a critical, often underestimated role.

"On average, large IT projects run 45 percent over budget and 7 percent over time, while delivering 56 percent less value than predicted." Source: McKinsey and University of Oxford, study of more than 5,400 IT projects

The purpose of a contract is to create solid alignment between the two parties around a common goal: delivering a quality solution on time, for a set budget. Yet several traditional models carry significant limitations.

Why do traditional IT contracts create tension?

Traditional models, time and materials as well as fixed price, misalign the interests of the client and the integrator from the moment of signature. Here are their respective limitations:

  • Time and materials: the client bears all the financial risk. The integrator is, consciously or not, incentivized to prolong the project. A client who is not rigorous in contract management will quickly see scope, and costs, spiral.
  • Fixed price: this model pits interests against each other. The integrator seeks to do the minimum to maximize its margins, while the client demands the maximum for the minimum cost. This misalignment almost inevitably leads to tension and conflict.

What is a risk-sharing contract?

In PlanAxion's experience, the risk-sharing contract is the most effective approach for durably aligning the objectives of the client and the integrator. The integrator shares the risks, but also the potential gains. This model encourages efficient delivery, in a climate of collaboration rather than confrontation.

How does risk sharing work in practice?

The model rests on a clearly defined scope, documented assumptions, a fee target and a contingency band with penalties and bonuses. Here is the mechanism:

  • the project scope is clearly defined from the outset;
  • assumptions and responsibilities are documented in detail;
  • the integrator provides a solid estimate of its fees, which defines a target;
  • a contingency band is set: if costs overrun, the integrator is penalized; if savings are achieved, the integrator is rewarded with a bonus.

What results can you expect from risk sharing?

PlanAxion's experience shows that projects governed by risk-sharing contracts achieve superior results, for the client and the integrator alike. This observation echoes the research: McKinsey identifies building effective teams whose incentives are aligned with the overall goals of the project as one of the four dimensions that determine the success of large IT projects.

What should you remember before signing your next IT contract?

The contract model is not an administrative detail: it shapes the alignment of interests and, in turn, the odds of delivering on time, on budget and with the expected quality. Want to learn more about setting up a risk-sharing contract for your IT projects? Contact the PlanAxion team.

Frequently asked questions

What is a risk-sharing contract in IT?

It is a contract in which the scope is defined from the outset, the assumptions and responsibilities are documented, and the integrator provides an estimate that defines a fee target. A contingency band penalizes the integrator in case of overrun and rewards it with a bonus when savings are achieved.

Why is time and materials risky for the client?

Because the client bears all the financial risk. The integrator is, consciously or not, incentivized to prolong the project, since every hour worked is billed. Without rigorous contract management, scope and costs spiral quickly, at the expense of the client's budget and schedule commitments.

Why does fixed price create conflict?

Fixed price pits the interests of the two parties against each other. The integrator seeks to do the minimum to maximize its margins, while the client demands the maximum for the minimum cost. This structural misalignment almost inevitably leads to tension, conflict and constant negotiations over scope.

How does the contingency band work?

The integrator provides a solid estimate of its fees, which defines a target. Around this target, a contingency band is set: if costs exceed the band, the integrator is penalized; if delivery comes in below the target, the integrator earns a bonus. Risks and gains are shared.

Key takeaways
  • In PlanAxion's experience, the risk-sharing contract is the most effective approach for durably aligning the objectives of the client and the IT integrator.
  • Under time and materials, the client bears all the financial risk; under fixed price, the two parties' interests clash and almost inevitably lead to tension.
  • Risk sharing sets a fee target and a contingency band: the integrator is penalized for overruns and rewarded with a bonus for savings.
  • According to McKinsey and the University of Oxford, large IT projects run 45 percent over budget on average and deliver 56 percent less value than predicted.