- In PlanAxion's experience, the risk-sharing contract is the most effective approach for sustainably aligning the objectives of the client and the IT integrator.
- With time and materials, the client assumes all financial risk; with fixed pricing, the interests of both parties are at odds, almost inevitably leading to tension.
- Risk-sharing sets a target fee and a contingency range: the integrator is penalized for overruns and rewarded for savings.
- According to McKinsey and the University of Oxford, large IT projects exceed their budgets by an average of 45% and deliver 56% less value than expected.
In the world of IT projects, we often hear about budget overruns and missed deadlines. While these setbacks can be explained by technological and execution factors, the very nature of the contract between the client and the integrator plays a critical, yet often underestimated, role.
“On average, large IT projects run 45% over budget and 7% over time, while delivering 56% less value than predicted.” Source: McKinsey and University of Oxford, study of over 5,400 IT projects
The goal of a contract is to create a solid alignment between both parties around a common objective: delivering a quality solution on time and within a set budget. However, many traditional models have significant limitations.
Why do traditional IT contracts create tension?
Traditional models, such as time and materials or fixed price, misalign the interests of the client and the integrator from the moment they are signed. Here are their respective limitations:
- Time and materials : the client assumes 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 the scope—and the costs—spiral out of control.
- Fixed price : this model pits interests against each other. The integrator seeks to do the bare minimum to maximize margins, while the client demands the maximum for the lowest 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 creating long-term alignment between the client’s and the integrator’s objectives. 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 is based on a clearly defined scope, documented assumptions, a target fee, and a contingency range with penalties and bonuses. Here is the mechanism:
- the project scope is clearly defined from the start;
- assumptions and responsibilities are documented in detail;
- the integrator provides a solid estimate of their fees, which sets a target;
- a contingency range is established: in the event of an overrun, the integrator is penalized; in the event of savings, they are 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 both the client and the integrator. This finding aligns with research: McKinsey identifies building effective teams, with incentives aligned to overall project goals, as one of the four dimensions that determine the success of large IT projects.
What should you keep in mind before signing your next IT contract?
The contractual model is not just an administrative detail: it dictates the alignment of interests and, consequently, the chances of delivering on time, on budget, and with the expected quality. Would you like to learn more about implementing a risk-sharing contract for your IT projects? Contact the PlanAxion team.
Frequently asked questions
What is an IT risk-sharing contract?
This is a contract where the scope is defined from the outset, assumptions and responsibilities are documented, and the integrator provides an estimate that sets a target fee. A contingency range penalizes the integrator for cost overruns and rewards them with a bonus for savings.
Why is the time and materials model risky for the client?
Because the client assumes 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 can quickly spiral out of control, to the detriment of the client's budget and schedule.
Why does fixed pricing create conflict?
Fixed pricing pits the interests of both parties against each other. The integrator seeks to do the bare minimum to maximize margins, while the client demands the maximum for the lowest cost. This structural misalignment almost inevitably leads to tension, conflict, and constant negotiations over scope.
How does the contingency range work?
The integrator provides a solid estimate of their fees, which defines a target. A contingency range is set around this target: if costs exceed the range, the integrator is penalized; if they deliver under the target, they are rewarded with a bonus. Risks and gains are thus shared.
- McKinsey and University of Oxford, Delivering large-scale IT projects on time, on budget, and on value: average budget overrun of 45% and schedule overrun of 7%, 56% less value than expected; aligning team incentives is one of the four dimensions of success
- PlanAxion, Project cost estimation, simple but unforgiving: rigorous estimation, a prerequisite for any reliable fee target