Litigation Risks for Vendors in Agile Development and Practical Precautions – Part 2: Estimation Phase
Jul 01, 2025
- Blog
- Agile Development
- Dispute Resolution
- Estimation
- IT Contracts
- Legal Risk Management
- MVP
- Project Management
- Software Development
April 8, 2025
Introduction: The Unique Legal Risks of Agile Development
[Conclusion]
While highly flexible, agile development carries different legal risks than traditional methods. Disagreements over “estimates” are particularly prone to escalating into disputes. This article explains the legal issues at the estimation stage and provides practical, lawyer-recommended countermeasures to avoid litigation.
The adoption of agile development is rapidly increasing in the IT industry. Its flexibility and speed make it a powerful tool for adapting to a fast-changing business environment. However, these same characteristics create unique legal risks, distinct from those in traditional waterfall development.
This article focuses on the key points to consider, especially during the estimation phase. Let’s examine the potential litigation risks in agile projects and the practical strategies to avoid them.
Why Gaps Occur: Expectation Gaps and Structural Problems in Agile
[Conclusion]
In agile development, the developer and client have fundamentally different expectations for an “estimate.” The developer can only provide a “rough figure,” while the client wants a “fixed number” for budgeting. This initial mismatch becomes a primary source of future conflict.
The Mismatch in Expectations
A structural difference in communication exists between the development team and the client (user company). This difference creates a gap in expectations from the very beginning of the project.
The Developer’s Perspective
- Wants to provide honest technical explanations.
- Wants to make proposals based on technical reasoning.
- But also needs to win the contract.
Balancing these three factors, the developer often ends up providing a “rough estimate.”
The Client’s Reality
- Often lacks a clear requirements definition.
- Requests an estimate for budget planning.
- Expects a “preliminary number” to work with.
This structural mismatch becomes the seed of future disputes.
The Reality of Budgeting: A Plan Without a Buffer Is a Path to Failure
[Conclusion]
From a legal standpoint, a budget plan with no buffer is extremely dangerous. Cost overruns are almost certain, leading directly to disputes over additional fees. It is essential to communicate that costs will rise with increased scope and to visualize this, making the user aware of their current position in the budget.
The Importance of a Sufficient Budget
A budget with a sufficient buffer is indispensable for project success, and this is critically important from a legal perspective. A plan with no buffer will almost certainly lead to cost overruns, which in turn leads to conflict over additional billing.
Many vendors will offer several options, such as a minimal plan and a guaranteed plan. However, the “minimal plan” often only reflects the vendor’s hopes, and the user may not understand its limitations. In such cases, the only option is to clarify what is missing, ensure the user understands the risks (and that they can terminate the contract at any time), and then conclude the agreement.
The Failure to Build an MVP
A common failure pattern in many projects is the inability to build a Minimum Viable Product (MVP) due to feature creep in the initial design. This essentially makes the project “set up to fail” from the start. Legally, poor judgment at this stage becomes problematic, carrying the risk of being contested later as “default” or “breach of the duty to explain.”
MVP Thinking as Market Strategy and Its Legal Implications
[Conclusion]
The core of agile is to launch with minimal features and gather feedback. Aiming for a “big win” by packing in features often leads to budget overruns. From a legal perspective, this cost overrun is a major point of contention in contracts, making the scope of the MVP extremely important.
Agile’s Basic Strategy
Launch with minimal features and get feedback early. This is the fundamental strategy of agile development.
The Legal Significance of a “Team Contract”
[Conclusion]
Agile development requires building a relationship where the developer and client “function as a team.” Legally, it is effective to specify a “verification phase” in the contract, allowing for compatibility testing for a small fee. This significantly reduces the risk of disputes after the full contract is signed.
Building a “Team Contract” Relationship
Quickly creating a prototype and proceeding with development while re-estimating costs—this is the essence of agile. However, the most crucial element is building a relationship where the developer and client can “function as a team.”
The moment the developer is seen as “just a resource to build a product,” the project begins to fail. The same applies to the contractual relationship. It is desirable to establish a process to test team compatibility while receiving some compensation. Creating a mechanism for termination through discussion can ultimately protect you. Be aware, however, that subsequent engineers may blame their predecessors to justify more time. Therefore, it is vital to keep records to make it difficult to lie.
Q. When should effort estimates be given? What are the legal risks?
A. In agile, effort estimation is often a lower priority than project progression. However, in litigation, the “timing of the estimate presentation” and “explanation of prerequisites” become crucial evidence. The court will strictly examine whether proper explanations and agreements were made when changes occurred. In most cases, the product owner will request major changes or add details *after* the estimate. The key to survival is how well you can communicate (and visualize) the resulting increase in scope and cost.
The Special Nature of Estimates in Agile
In agile development, effort estimates tend to become more concrete as the project progresses. This is an unavoidable aspect of the methodology. However, many users do not provide requirements documents until the kickoff meeting.
When a dispute goes to court, the evidence of “the estimate and its explanation” becomes paramount. The court will focus on points such as:
- When and how the estimate was presented.
- Whether the prerequisites for the estimate were clearly stated.
- Whether appropriate explanations and agreements were made when changes occurred.
Although you want to finish quickly, it is essential to visualize the work effort and clarify what the customer is requesting.
Documentation: The Lifeline for Dispute Avoidance
[Conclusion]
From a legal perspective, records such as minutes and backlogs are essential. It is particularly necessary to clearly record “who” decided “what” and “when.” This becomes definitive proof in a dispute to establish who approved what. Using recording and automatic transcription tools is also effective.
What to Record
From a legal standpoint, the following records are indispensable:
- Sprint Backlogs: Development details for each sprint, history of priority changes.
- Product Backlogs: Overall functional requirements, records of additions, changes, and deletions.
- Regular Meeting Minutes: Date, time, participants, clear identification of decision-makers, decisions made, and pending items.
It is especially important to detail the meeting content and identify the decision-makers. This serves as definitive evidence in a future dispute to prove “who approved what.” For more on official guidelines, see resources from authoritative bodies. (e.g., resources from the Agile Alliance).
Using Digital Tools
Today, there are many tools for automatic minute-taking and project management. Actively using these to maintain continuous records is an extremely effective legal defense. However, even with digital tools, if you fail to manage user expectations properly, it will lead to the worst possible outcome.
Four Practical Lessons for Avoiding Disputes
[Conclusion]
To avoid disputes, four points are crucial: 1. Early Boundary Setting, 2. Expectation Management, 3. Honest Documentation Strategy, and 4. Prompt Escalation. The best defense is to agree in writing, at an early stage, on the criteria for when a requirement change necessitates a re-estimate.
1. Early Boundary Setting
If you feel a dispute is inevitable, clarify boundaries early. Time only increases litigation risk. Clearly state in the contract or a memo:
- When and under what conditions the basic design can be changed.
- The criteria for when a specification change requires a re-estimate.
- The notification and approval process for additional costs.
2. Expectation Management
Client expectations change based on when and how estimates are presented. You must explicitly state in writing at the initial stage that “estimates will be expanded and revised in phases” and get agreement. Verbal explanations alone risk being met with “I was never told that.”
3. Document Strategy: Honesty is the Best Defense
Honestly record facts like “requirements were unclear at this point” or “waiting for client response.” This clarifies the responsible party later.
Recommended Methods:
- Use automatic transcription tools.
- Clearly identify decision-makers (who approved it).
- Explicitly record pending items.
4. Escalation Criteria
If user demands become excessive, it is crucial to quickly gather evidence and escalate to a superior. This not only prevents team burnout but also serves as legal proof that “appropriate measures were attempted.”
The Strategic Significance of “Provisos” in Early Estimates
[Conclusion]
Presenting an estimate as early as possible is important for managing expectations. However, you must always include “provisos” in writing, stating that it is a “provisional estimate” and “subject to change based on requirements.” Then, disclose estimate adjustments as needed.
Presenting an effort estimate as early as possible is key to managing expectations and avoiding conflict. However, this “early estimate” must include the following conditions:
- “This is a provisional estimate based on currently known requirements.”
- “The estimate will change based on additions or changes to requirements.”
- “A formal estimate will be provided after requirements definition is complete.”
Conclusion: Agile Development from a Legal Perspective
[Conclusion]
The flexibility of agile development is two sides of the same coin, creating risk through legal ambiguity. However, litigation risk can be significantly reduced by upholding four principles: 1. Transparency (records), 2. Continuous Agreement, 3. Proper Contract Design, and 4. Early Warnings.
Agile’s flexibility carries the risk of legal ambiguity. However, this risk can be significantly mitigated by adhering to the following principles:
1. Ensure Transparency
(Record everything / Do not hide uncertainties)
2. Maintain Continuous Communication
(Regularly review estimates / Explicitly agree on changes)
3. Design Appropriate Contracts
(Choose contract types suited for agile / Specify the change management process)
4. Use Early Warning Systems
(Don’t ignore signs of trouble / Escalate in a timely manner)
Litigation risk in agile development is fully manageable with proper preparation and continuous documentation. By combining technical excellence with legal diligence, truly successful projects can be realized.
Akasaka International Law & Accounting Firm provides legal support for IT contracts and agile development. Please feel free to contact us for contract reviews before your project begins or for documentation design to prevent disputes.
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