The Fixed cost model: Pros & Cons

Whether you offshore, nearshore or use subcontractors, it can be tricky dealing with vendors locally and internationally. Many managers feel safeguarded to choose the fixed cost model with the intent to avoid cost over runs. The objective is to look for a predictable scenario where both parties honour the engagement, and the work gets completed through a hassle-free partner.

Managers have restricted budgets, hence they intend to get more done within their allocations. Let’s admit, that a fixed price contract looks a lot simpler than an ongoing engagement. While a fixed price contract is more predictable, it could come at a price, hence there are pros and cons compared to Time-and-Material.

Pros

• Fixed budget: Though a fixed-price model may cost more up front, it’s easy to budget and ensure the funds are planned in advance for the engagement. If cost of goods or service increase, buyers can easily ignore to worry about these overruns.

• Changes: If a project costs more, it should ideally be done mutually with a detailed change plan, hence adding time & effort to both parties. Most buyers tend to command a leverage during a change plan.

• Less supervision: Once the ownership is on the seller to fulfil their contractual obligations, its less supervision for the buyer.

• To get it professionally done: At times, its much better to pay that additional fee that gives you freedom to do other things. You have a lot of free time while your project gets developed. You can focus on other company issues, take a holiday, just wait for the outcome, while your project is being executed by professionals.

Cons

• Strict requirements: The objective of fixed price is aimed to forecast the amount of time and effort to be spent for the project scope. In a fixed price contract, unlike Time-and-Material, requirements must be strictly defined. Its always hard to think through the precise scope down to the last detail, hence any scope creeps could go through unhappy discussions about extended costs & budgets.

• Suppliers could focus more on completion: Every manager wants their supplier to complete projects on time and within their budgets. But the main focus of every project must be, to execute the scope by maintaining high quality standards, and surpassing buyers’ expectations. In most cases nice ideas for improvements evolve during the execution of the project and managers lay down quality standards to meet their long-term goals during the project lifecycle. This is when buyers and sellers come to a crossroad, and everyone's balancing the thin rope of cost, quality, and timeframe.

• A fixed price engagement does not fit you: If you are trying to execute a complex project, with an agile scope and specific quality standards that keep evolving, then a fixed price model will not fit you. Also, it gets harder to satisfy the needs of large projects that require building complicated functions to achieve long term goals.·

• Fixed price is more expensive since sellers’ factor in fluid situations that include

o currency fluctuations

o market changes that affect resource costs or material shortages which are

necessary for production

o a percentage buffer in case of project contingencies

o inactive staff time that could happen during project life cycle when milestone

deliveries are under review by the buyer

o inactive staff time that could occur post project completion (if any), when the

same staff are planned to work on their next assignment.

In Conclusion

For sure, each engagement model has both pros and cons. But our objective must be to get maximum benefit based on the type of project we intend to execute. While choosing a fixed price model it is important to see if it fits your needs, and complexity of work involved. Our absolute focus on cost, should not force us to trade on quality, user experience and long-term outcomes.

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