Why Fixed-Scope Software Contracts Create Perverse Incentives
Fixed-scope contracts make intuitive sense. Define what you want, agree on a price, set a delivery date, and hold the vendor accountable. For commodities, construction, and manufacturing, this model works well — the requirements are knowable upfront, the specifications are concrete, and the finished product is measurable against a defined standard. But software isn't a commodity. And when you force a commodity contracting model onto software development, the incentives go sideways in ways that hurt everyone involved — the agency, the vendor, and the end user.
This isn't a new observation in the private sector, where agile methodologies and outcome-based contracts have become mainstream. But in government procurement, fixed-scope software contracts remain the default, driven by acquisition frameworks designed for predictability and auditability. The result is a contracting structure that often produces the opposite of what it's designed to achieve.
The Illusion of Predictability
The premise of a fixed-scope contract is that you can define what "done" looks like before work begins. For software, this assumption is almost always wrong — not because agencies don't know what they need, but because the process of building software reveals requirements that weren't visible at the outset.
Users interact with an early version and realize the workflow doesn't match how they actually do their jobs. An integration with a legacy system surfaces data issues nobody anticipated. A security review identifies architecture changes that weren't in the original design. These aren't failures of planning — they're inherent to how software development works. The product informs the requirements as much as the requirements inform the product.
A fixed-scope contract treats all of this as deviation. Every discovery, every refinement, every user-driven improvement becomes a change order — a formal, costly, time-consuming process that punishes learning. The contract was built on the assumption that the scope was complete and correct on day one, and every departure from that assumption creates friction instead of progress.
Where the Incentives Break Down
Once a vendor signs a fixed-scope software contract, their financial incentive is straightforward: deliver the defined scope at the lowest possible cost. That sounds like accountability, but in practice it creates several distortions.
The incentive to underbuild. If the contract defines 50 features, the vendor's goal is to deliver 50 features — not to deliver a product that solves the underlying problem. Meeting the letter of the specification becomes more important than meeting the spirit of it. Features get checked off as "complete" based on narrow acceptance criteria, even when the implementation doesn't actually serve the user's needs. The vendor isn't cutting corners out of malice; they're responding rationally to a contract that rewards output over outcome.
The incentive to hide problems. In a healthy development process, surfacing issues early is a good thing. A team that discovers a technical challenge in week three can address it cheaply. A team that hides it until month six cannot. But under a fixed-scope contract, surfacing a problem often means acknowledging that the original scope was insufficient — which opens the door to uncomfortable conversations about cost overruns, timeline extensions, and blame. The safer play, from the vendor's perspective, is to work around problems quietly rather than escalate them transparently. This makes the eventual reckoning worse, not better.
The incentive to avoid iteration. Good software gets better through feedback loops — build something, put it in front of users, learn, adjust. Fixed-scope contracts punish this cycle because every adjustment is a scope change. Vendors learn to resist user feedback, not because they don't value it, but because incorporating it threatens their margin. The contract incentivizes building to spec, not building to learn.
The incentive to win on price, not capability. When the scope is fixed and the evaluation is lowest-price-technically-acceptable, vendors compete by minimizing their estimated cost — which often means underestimating complexity, understaffing the team, or assuming best-case scenarios on every technical risk. The result is a contract that's priced for a reality that doesn't exist, awarded to a vendor who was the most optimistic rather than the most capable.
The Change Order Cycle
The inevitable result of a fixed-scope contract on a project with evolving requirements is a change order cycle that consumes more time, money, and administrative energy than the original development work. Every new requirement, every user-driven refinement, every integration surprise becomes a formal modification — with its own approval chain, cost negotiation, and timeline impact.
In federal contracting, this cycle is especially painful. Contract modifications require documentation, justification, and often additional competition or sole-source approval depending on the scope of the change. The overhead is significant, and it creates a perverse dynamic where small, high-value improvements — the kind that would take a development team a day or two to implement — get deprioritized because the contracting process to authorize them takes weeks.
Agencies end up paying more for less. The original contract delivers a product that doesn't quite fit. The change orders needed to make it fit cost a premium. And the timeline stretches well past what it would have been under a more flexible contracting model. Everyone involved knows this, but the acquisition framework doesn't easily accommodate the alternative.
What Better Looks Like
The private sector's answer to this problem has been outcome-based and time-and-materials contracts paired with agile delivery models. Instead of defining every feature upfront, you define the problem to be solved, establish a team and a budget, and measure progress against working software — not specification checklists.
In government, this approach is gaining traction but still faces structural resistance. The 18F/TTS playbook, DOD's software acquisition pathway, and various agency modernization initiatives have pushed toward modular contracting, agile-friendly contract structures, and evaluation criteria that reward demonstrated capability over lowest price. But these approaches require acquisition professionals who understand software — not just contracting rules — and that expertise isn't uniformly distributed across the federal workforce.
The realistic middle ground for many agencies is a contracting approach that acknowledges uncertainty without abandoning accountability. That can look like contracts with well-defined objectives but flexible scope within those objectives. It can mean evaluation criteria that weight past performance and technical approach more heavily than price. It can involve structured checkpoints where scope is reassessed based on what's been learned rather than frozen at kickoff.
None of this eliminates risk. But it aligns incentives so that vendors are rewarded for building the right thing rather than building to spec, and agencies get working software instead of compliant paperwork.
How Viceroy NM Thinks About Contract Structure
At Viceroy NM, we see the downstream consequences of misaligned contract structures every day. As a federal procurement partner working across DLA, Army, Navy, USCG, USDA, and State Department solicitations, we regularly navigate the tension between rigid contract requirements and real-world complexity — whether that's a solicitation where the SOW doesn't match the actual need, a modification that fundamentally changes the procurement challenge, or compliance requirements that weren't contemplated in the original scope.
Our role is often to bridge the gap between what a contract says and what the mission actually requires. That means we read solicitations critically, flag structural issues early, and build our responses around the real-world feasibility of what's being asked — not just the easiest path to a compliant submission. When contract modifications land, we don't treat them as paperwork; we treat them as a signal that the sourcing picture has changed and re-evaluate accordingly.
We don't write the contracts. But we understand intimately how contract structure shapes procurement outcomes, and we bring that perspective to every bid we touch. For agencies and primes wrestling with acquisition strategies that don't quite fit the work they're trying to get done, having a procurement partner who understands the why behind the what makes a material difference.
If you're navigating complex solicitations and need a partner who thinks beyond the checklist, let's connect.
