A Fixed Price Contract for Your Project: Pros and Cons
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- Опубліковано 24 лип 2024
- What are the pros and cons of doing fixed price contract for your project?
That's the question I answer in this video, from the point of view of a contractor providing projects for their clients.
Principally, the pros and cons of a fixed price project are what you'd expect…
It's all about risk.
Things will be fine if you can do three things:
1. Price your project accurately,
2. Put in a sound contingency and an appropriate profit margin (if you are working for a return), and
3. deliver to time, to budget, and to specification.
If you do all three, you will retain your contingency and make your planned profit. All will be good.
But, that doesn't always happen.
1. If you fail to price accurately.
Probably due to poor estimation practices or faulty starting assumptions...
2. If you do not put in enough contingency.
Nor a sufficient profit margin, if you are managing commercially...
3. If you then deliver over budget, beyond deadline, or outside of acceptable specification...
Then you will have to bear all of the costs of financial and schedule over-runs, and putting right the products.
Your client sees pros and cons too:
Pro:
Financial certainty, which makes planning easier and is good for governance. Some organizations rightly choose to minimize risk and so prefer to pay a premium to do so. This is particularly those in the public and not-for-profit sectors.
But beware the naive client who wants their cake and eat it. That is, they want a fixed price and a low price too. Don't ever succumb… That way leads to too much risk.
Con:
Cost. A project manager would (and should) cost in a premium for the risks above. This can be either as a greater contingency, or a bigger profit margin.
You should not double up though, and increase both. That seems to me to be rude. It's often a case of double counting or profiteering. But you'd only get away with it if your pricing lacks transparency, and that's poor practice.
Along with risk, come other things…
And from these, I'd single out stress. Fixed price projects tend to be more stressful. This is because, as a project manager, you are bearing more risk.
Now, stress can induce errors. So this can easily become a downward spiral. The reality of fixed price projects is unrelenting pressure on schedules, budgets, and delivery.
The Truth Buried in the Whole Assessment
Anyone who has followed my videos and writing will recall this. I often say that the triple constraint won't solve any of your problems, but it will make your choices clear. Fixed price projects force the choice. You have an immovable constraint.
So, ultimately, the pros and cons come down to one thing...
The Pro is that you get you absolute focus on cost.
The Con is that you may sometimes need to trade this for schedule, quality, or scope.
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Very well delivered message!
Thank you for your time to share experiential knowledge.
You're welcome, Gagandeep.
Very Well explained ! Thank you for sharing
My pleasure!
Nice breakdown, Mike.
Thank you, Bruce.
Thanks for putting all in one! As a developer, I'm demolished by the managers' f*ck ups when estimating the projects. Moreover, it impacts my professional self-esteem and leads to severe burnout. I'm not even sure if it can be avoided. It's a one gate game.
Thanks for sharing your experience. It's not uncommon, I think.
Maybe I should do a video about the dynamic of someone else estimating your work! It's just rude to do so without proper consultation.
I'm in the same boat as you and I'm at the point of severe burnout. Fixed price only works for simple projects with low requirements, for complex projects it just leads to constant scope creep and severe overbudget.
Excellent presentation.
Thank you kindly!