The Agile Fixed Price is a compensation model that is often used for software development contracts with agile project methodology. This agile fixed price takes account of the fact that it is not possible to make a reliable, stable estimate of effort (and costs) at the start of a project.
However, this compensation model does not do without an up-front cost estimate: This is created in a similar way to a (rough) release planning in Scrum projects. The features are described on a high level. However, some selected features are broken down into user stories and evaluated with story points. The practical value of the team that estimated the story points is used for the velocity. On this basis the total effort is estimated.
Since both parties to the contract are aware that this can only be a rough estimate, a risk share is agreed upon in the following. This defines approximately the following rules: If the effort for a feature was higher than the estimated effort, the additional effort is distributed between the client and contractor according to a certain key (e.g. 70% contractor, 30% client). Additional work for new features is entirely at the expense of the client. And so on.
