Why Do Customers Want and Agencies Fear Fixed-Price Projects?

Fixed-Price for Customers: It’s Just So Simple! 

For customers, fixed-price projects represent a typical purchase in a supermarket - for a clearly defined price, they get a product they need. That is why corporate clients are eager to push for this billing type. 

From their perspective, fixed-price projects are the safest and the most beneficial option, as: 

1. Growing project scope does not impact the final price - it stays the same regardless of the amount of work done by the contractor company. 
2. Vendor accountability is much higher, as the vendor covers all the costs related to additional work, moved timelines, or other inefficiencies. 
3. Project management is simplified since the vendor is responsible for delivering the project as specified, regardless of the circumstances. 
4. Fixed-price projects encourage bidding at the offering stage, allowing the customer to choose the best option. 

In short, with fixed-price contracts, customers know what to expect, when, and for how much. Such specifics are not so easily defined for Time and Material projects that sometimes drag on, generating additional costs. 

Fixed-Price for Service Providers It’s Just So Risky! 

Ironically, the same reasons that make fixed-price projects attractive to customers also make them very risky for the providers and vendors. The reason is simple: they are responsible for the entire project and, more importantly, its profits. Therefore, if a change needs to be made in either plans or budgets, the provider needs to cover its costs, lowering the profits of their business while supporting the customer’s operations. 

However, with big risks come great rewards. As fewer companies offer fixed-price contracts due to their financial risks, the providers that do have such a billing type in their offer might have a competitive advantage. In short, they will appeal to numerous customers who value simple and secure contracts—and who wouldn’t like one of those? 

How to Make Fixed-Price Project Risk-Free For Providers? 

Fortunately, fixed-price projects do not need to remain high-risk - high-reward undertakings. With the right approach, they can become a source of enormous profits and a competitive advantage other companies won’t be able to match. 

Here’s how to make that happen. 

Focus on The Right Types of Projects

In the case of fixed-price contracts, not all projects are created equal. Some tend to be more successful than others and easier to accurately estimate, ensuring the financial and operational success of the entire operation. Those projects include: 

1. Quick fixes or any other project requiring a lot of work over a short period. As they do not require long-term planning, their allocations, and budget estimates are more likely to be accurate, providing the managers with crucial information required to determine the final price of such an operation. 
2. Gray-haired projects, or any operations your company is experienced in completing. Using historical data, such undertakings and their costs can be accurately estimated, providing solid ground for their final price. 

Work with Actual Data To Plan and Budget

Before you accept the project, ensure you have the right people with the right wages ready to complete it. 

To do that, create a project plan that includes the costs of work in order to estimate the expenses you have to cover. Then, add company overheads to the budget to ensure company-wide costs are accounted for. 

Additionally, if your project is prone to scope crawl (or a sudden change in the amount of necessary work), add some buffer budget to the equation - preferably based on historical data from similar operations. Then, having prepared such a realistic estimate of possible costs, you can add some additional costs or income to the project calculation.

Include Changes Over Time in Your Budget

Budgeting tends to be a more demanding process for long-term projects. To ensure that changes in inflation or market conditions are reflected in your profit plans over the years, adjust the project's final price based on the expected growth of your expenses based on the simulated inflation rate. 

Remember to revisit the calculations to verify your assumptions and make necessary changes for longer projects. 

Don’t Do It Alone - Do It With Primetric 

Of course, you do not have to perform all of these calculations in Excel spreadsheets. Instead, you can gather all the data in a single source of truth and do it with Primetric. 

Book a demo with our advisors and see how we can improve your forecasts - and your profits. 

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