In scenaios where an RFP is issued by a customer for a vendor to be selected based on a certain technical and financial criteria, i.e. in a fixed scope / fixed price projects, is there any methodology can be used other than WATERFALL. I.e. Can the Incremental / Iterative approach work?
Why wouldn't you be able to do iterative? You can chunk up work in any size and do design-build-test iterations. I suppose what you're asking is whether or not a lightweight methodology designed to deal with changing or undefined scope is appropriate. I dont' see why FDD is not appropriate, for example, just because you know where you are going. :)
If they want that type of proposal, then they are presumably prepared to pay the price in change orders and large buffers (in time and $$) for unknowns. And you can bid accordingly.
But once the contract is signed, the most productive methodology is what it is. And if you're flushing out the risk factors, delivering early and often, etc. you just have the benefit of writing those change orders sooner.
Agile techniques are designed to contain change, but they work just as well if change is not so great. Most of the benefits still accrue. Just divide the work up into customer stories, the stories across milestones, and start the iteration clocks running. It should work just fine. You'll have to do a little more planning up front, but that doesn't imply waterfall.
Waterfall is when you do all the planning, then all the coding, then all the testing/debugging in that order. Instead you can do just enough planning, then iterate through planning/coding/testing cycles.
I think agile and iterative approach can be used and is important in many levels. The phase of defining business needs is extremely important and should also be iterative. By requesting fixed scope / fixed price contract the customer is giving up the chance to be flexible and killing the spirit of agile. Of course you can and should do some iterations even under fixed scope contract. But the most valuable advantages of iterative approach have been lost with signing the fixed scope.