Fixed Versus Flexible – Guess Who Wins?

calendar Updated December 05, 2022
Fixed Versus Flexible – Guess Who Wins?

Are you a project manager whose dream is to have all your projects use a Time and Material pricing model?

Are you the type of client who develops an uneasy feeling that you’re being deceived when you see another unexpected bill for what your outsource team calls “extra scope”? Have you experienced “Scope Creep” too many times?

As the COO of a large outsourcing company, I’ve seen a large number of clients that have experienced these two scenarios. Believe me – it’s not a pleasant experience for any of them.

The classic situation for most Fixed Price cases looks like this:

Customer vs Vendor

After many certain number of trials and errors, we’ve learned and understood that this is the best way how to meet our clients’ needs and still make a profit.  The Ready-to-use recipe step-by-step process can be found below:

  • A Spec Requirements document is a “must have” with all fixed price projects. Even if a company has already spent 100,000 on a project, most software development firms need to start all over again from scratch. People who aren’t developers do not understand how to put together a quality project requirements document.

    Timeline: 2-3 weeks. Budget: 2-3k USD.

    The purpose is to minimize mistakes, prevent cost overruns and to reduce risks. This can create the best possible scenario so that the customer is happy and willing to refer friends in the future. (This is a topic for another blog post)

    Deliverables: user stories, wires, clickable prototype, test plan, project plan, and a detailed estimate that includes EXACT budget numbers. Based on my experience, the average increase in hours from the original scope in usually between 3-7%. If you are needing to have development work done, and don’t want to spend a little extra money upfront to understand all of the “whats” and “hows” – be prepared to spend at least an additional 30% over the original agreed upon hours in the contract.

    If you are still not convinced that the first scenario can happen or you are in a hurry and just don’t want to “waste” 2 weeks, you better include a ~30% cushion for unexpected costs in your Project budget (again this is based on my experience). It will happen to be sure!

    For example:

    • Please change subject line in the email we send after user has been registered in the system
    • Sir, we need 0.5 hours to do that.
    • What? Why? It’s just copy and paste action.
    • Yeah, but we need to find where to do changes, then make those changes, test it and finally deploy it.
    • Then multiply it by 3 times at least (subject line can be changed three, four or more times… get ready!)
  • If you want to continue the Project and ignore the advice in # 1 and #2, then be prepared from the start that the vendor will not do any additional work that is “out-of-scope” if:
    • It is not signed off under a Change Order agreement and
    • It is not paid one hundred percent upfront. You can still work things out, but you should be aware of these key issues.

The Following Matrix provides a comparison between Time and Material (T&M) vs Fixed Price Projects can help you to understand what is really under these two different payment terms. The information above was all concerned with the Fixed Price model.

Time and material vs Fixed Price

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