Fixed Price Projects have a bad reputation. If you’ve worked in our industry for a while, you’ll understand why. We overpromise to close the sale and underdeliver when reality hits us hard.
Vendors will pitch a FPP to convince a customer that doesn’t really trust them. IT managers will accept since it sounds like a safe deal.
Companies like the certainty FPP give them. For €X, you’ll get a “complete thing”. That guarantee makes it possible to budget and plan. There’s a reason for the success of boxed software and SaaS solutions: it’s easy to know how much it will cost. Developing a custom system is highly expensive and unpredictable. It makes buyers uneasy and rightfully so: there’s a real risk of things going south.
A Fixed Price on an uncertain project is a risk. A risk most software vendors are willing to take to attract customers. It’s easy to blame the vendors, but it takes two to tango. Businesses that put a fixed price on a vague scope document know full well their vendors won’t be able to deliver. It’s a way of passing the buck.
So, what to look for in a Fixed Price Project. What are the traits of a good one and how can you spot a bad one before signing the deal?
Any fixed scope project that lasts longer than 6 months is unstable. The world moves so fast that it’s impossible to know what you’ll need in half a year from now. It’s not unpredictable: you can be sure that it will go wrong. Get out!
A tried-and-tested sales technique is underselling a FPP to get the proverbial foot in the door. In a very competitive market, this is a smart sales move. Vendors are often prepared to lower their margins to get your sales. Some of them will even work at a loss. They believe that once the first project is done, they’ve built up enough trust to start charging you the real deal.
I’ve never seen this work. Companies with these kinds of sales tactics rarely put their best people on those projects. You’ll get a revolving door of juniors and new hires. By the time the first project is done, there is usually friction instead of trust. Even if it goes well: why would you start paying more now that you’ve got to know each other? It’s an aggressive sales tactic that never turns out well for the buyer.
Make sure that the project is realistic by getting advise or comparing offers from different vendors.
Whenever an account manager brings up that “it’s not Fixed Price, but Fixed Budget”, the alarms should sound. What’s the difference, you ask? Flexible scope. They are well aware of the side-effects of FPP but want to hold on to the great sales factor. They are guaranteeing you that “it will not cost more than €X”. They cannot tell you what “it” will be.
Fixed Budget, Agile scope, Lean projects,… It all sounds better than what it really is: a project without guarantee on result. A Fixed Budget is also known as … your budget: The highest amount of money you are willing to put on the table.
What are the chances that you’ll have the “complete thing” once the money runs out?
Sometimes, there’s a job that’s small and clear cut. Let’s say you need to get a lead magnet landing page out. You don’t want to put this on the to-do pile of your own team and decide to delegate it to an external party. That’s what FPP are designed for! As a rule of thumb, you should be able to write the entire scope of the project on an A4 and it shouldn’t last more than 2 months.
You’re looking for a vendor to collaborate with. They don’t know you, you don’t know them. So you start out with a small FPP to test the waters. That’s a great approach! When the project is delivered, be very critical. Do you see this relationship working? Did they deliver what they promised? How’s the quality? If you’re not satisfied: find another vendor. But if you are, stop the FPP-pressure. Give them a budget and an outcome to work towards and allow them to staff a stable team to build your products.
More often than not, Fixed Price Projects are not the right approach. There is a place and a time for them. A lot of companies feel they can use this to keep the pressure on their vendors and to squeeze out more. While that might work with some smaller vendors, most agencies have sold more of those projects than you have bought. They know the ins-and-outs of these contacts better than you. Beware.
Fixed Price Projects are great for small projects that are not mission-critical and as a way to build trust. After that: move on to better ways.