Mike Wyatt's Weblog

Fixed Fee, Time and Materials, and Not To Exceed

When customers engage our company to provide professional services significant time is spent discussing the payment structure for the services. Broadly speaking there are 3 categories:

• Fixed Fee

• Time and Materials

• Not-to-Exceed

In this entry we will look at Fixed Fee. With a fixed fee engagement, there is typically a finite set of deliverables and key project milestones. Billing will be based upon reaching a milestones and obtaining signoff from the customer. This can be a mutually benefitial arrangement for both the service provider and the customer.

First, the customer knows up front the cost of the project, assuming and this is a big assumption, little to no change in project scope. For the service provider fixed fee engagements present a double edged sword. If the vendor is able to complete the project faster or with fewer resources, the margin for the project improves. conversely, if assumptions made during the sizing of the engagement prove not to be true or if sizing estimates are just wrong, this can be a very high risk engagement for the services provider. Early on at Waveset we agreed to do a project fixed fee for $70K. We really wanted to close the deal and didn't perform a good discovery / requirements definition. Had we billed time and materials, it would have been a $350K engagement. Luckily we didn't sign up for too many of those projects as a young software company.

Fixed fee does work well when using a known solution approach, the right skills for implementors, and appropriate customer expectations. When is Fixed Bid bad from a customer perspective? If the customer is only 85% or less sure of the desired end state, Fixed Fee will be frustrating. As the customer learns more about the products in the solution, they almost without exception want to make "small changes" which from the services provider perspective may or may not be small at all. Often, an adversarial relationship develops between the solution provider and the customer. The service provider wants to make the targeted profit margin and mitigate project risk. The customer does not want to be nickel and dimed to death with change control change orders. Even if the project finishes "to spec" the customer often does not have a good feeling about the engagement.

The best remedy for this situation is to have fixed fee engagement tightly and narrowly scoped with plenty of presales discussions regarding the expectations for the project, especially clearly defined items that are OUT of scope. I'll review my take on the other engagement types in future postings.

Posted at 07:57AM Oct 25, 2006 by Michael Wyatt in Identity Management  |