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Fixed Fee Proposals and Risk

Published on

Feb 3

Gary Crouch

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A few years ago we changed our business model. We decided to introduce our Protection Pricing and no longer give proposals that include an estimated amount for services for several reasons.  

First, the risk of our being wrong with an estimate always fell to the customer while we possessed the most experience.  Second, estimates inherently lead to unethical temptations of billing more than is necessary in the name of helping the client achieve results.  Finally, the customer and the consultant always disagree on what the estimate means, creating conflict and distrust.  We want to be a valuable partner to our customers and estimates always seemed to drive a wedge between us.

It is incredibly interesting when we provide Protection Pricing (a fixed fee) for a project and competitors provide estimates.  The buyer frequently asks us to lower my prices to be more competitive.  For each bidder, there are three elements to determine the price of an engagement.

  • First, Scope - what resources are required to perform the tasks to meet the customer’s needs?
  • Second, Deadline - what is the time period required for completion of the project?
  • Finally, Price - what will be the total dollars to the customer for meeting their stated needs?

We can ALWAYS beat the competitors’ prices when we only have to provide an estimate for a loosely stated set of requirements.  For instance, “in our experience, an accounting system for a $20 million distributor is generally $75-100,000.”  Of course, every distributor has unique requirements which will affect the tasks necessary to implement a new system.  At the proposal signing, while you plan for $75,000 or possibly less, the consultant feels he has the green light to bill $100,000 and possibly more; both are thinking “it is only an estimate after all”.  Thus, lowering my team’s estimate to $70,000 to $95,000 really means nothing since we have no stated deadlines or detailed scope of work.

Protection Pricing is fixed-fee pricing for a project as opposed to an estimate

The knowledgeable buyer, on the other hand, takes the time to detail the requirements of the anticipated project, defines the timeframe in which the project needs to be completed, allowing for proper allocation of resources, and then requires a fixed price from those who should have the knowledge and experience to detail the true cost.  

If you insist on a fixed fee meeting the above requirements, the successful project should provide:

  1. A well-defined and agreed-to set of expectations in a scope of work document,
  2. A collaborative relationship with your implementation team that possesses a strong understanding of software functionality and required business processes,
  3. An assurance your budget will be met with no surprises at the end of the project, and,
  4. A new system that provides the effectiveness that you anticipated and which will pay dividends on your investment.

If the vendors ARE willing to provide the fixed fee proposal, typically all software implementation firms will hit amounts that are reasonably comparable.   If they vary much, there are generally two areas where differences may be found.  First, the software package may have inherent differences making one more suitable than the others.  

For an extreme example, and for good reason, a system based on SAP is going to be much more expensive than QuickBooks.  The SAP system has infinitely more capabilities.  However, for your specific needs one system is more suitable than the other.  The other area where the difference may be found is in the Scope of Work.  Pay special attention to who performs each of the tasks.  

As another example, the consultant may write all required reports, or the consultant may train your employees to write the reports.  Neither methodology is wrong, but you need to determine which is best for your needs.  Of course, some consultants just do not have adequate experience and will incorrectly quote the project.

Truly, a fixed fee project may well cost more than an hourly project.  The service provider is taking on the risk and deserves to be paid for the insurance of risk assumption.  The real question is whether the value of the project to you in increased effectiveness and efficiencies will exceed the price.  If you believe the project will save you $60,000 per year and you are quoted a fixed price of $90,000, you are in a better position than if the price is estimated at $75,000 but ends up costing you $105,000.  Sure, you had high hopes it would be less, but the reality left you with the risk.

If the vendor refuses to provide a fixed fee proposal you are in for a roller coaster ride with costs that may come flooding in on that last long drop before you pull into the station.   Ask yourself this:  Are they unwilling to provide a fixed fee bid because

  1. They believe it is highly probable the project is going to exceed their estimate, in which case their ethics should be in question, or
  2. They don’t have confidence in either their skills or understanding of the project to make a commitment, in which case you should question their abilities.

Plan for success and begin asking for fixed fee proposals now!  Define the project well, set the deadline based on your requirements and let the team with the most knowledge take the price risk.  After all, you are hiring them for their skills and experience.

Photo by NeONBRAND on Unsplash

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