What Does a Fixed Price Contract Really Cost?

You know your risks increase as the implementation of each of your IT projects is underway.

So, how do you know when you’ve made the right decision about how your projects are implemented and which service provider you use to avoid value leakage from your technology investment?

In your role as the CIO, we know you have to make a tough call when contracting service providers to implement your IT projects.

With the number of well-publicised IT project failures across the world[1] you know you need to take the risk out of your company’s project implementations and start generating an investment return prior to ‘go live’. This is particularly important as you move key elements of your business to the cloud.

Do you select a fixed price contract? Or, do you break with tradition and determine your project requirements dynamically, implementing your project using an agile approach?

Let’s have a look at the different approaches and what each means to your corporate risk:

Traditional fixed price contract, with project requirements specified upfront

Agile project implementation, using Scrum

• Fixed requirements, fixed price
• High investment required upfront
• Changes to requirements mean variations to the contract, and additional costs
• Extensive effort to capture detail across broad scope
• Requires additional project management and risk premium to be baked into the project price
• Invites acrimony, because the parties tend to be protecting their contractual entitlements.

• Dynamic, allows for changes in your business environment, and changes in your interpretation as to how the system should work
• Business Value delivered early and with quality, helps fund further iterations of the project
• Quality and alignment constantly checked through a collaborative team effort with the same goals. There are no big surprises.
• The parties are on the same team in a trusted partnership

Don’t worry, agile means good governance not anarchy. We’re not advocating you throw away all of the core values of sound project management. But the agile approach to project delivery, and particularly our adaptation of Scrum for Force.com engagements, allows for greater flexibility in how your project requirements are developed and delivered. Consequently we’re delivering fabulous business outcomes because of our adherence to Scrum.

Let’s look at the 10 aspects of a well-managed project versus 10 aspects of a poorly managed project and then assess these in light of the fixed price versus the dynamic approach.

Poorly managed project (using a traditional fixed price waterfall approach)

Well-managed project (using an agile approach)

1. You don’t really know what you want but you’re expected to specify it. All of it.
2. You pay a risk premium, or worse still your vendor underwrites their promise using an ill-considered offshore development arrangement. The latter often results in wasted time, and disappointing results
3. You are facing off as two parties protecting your position in a commercial contract
4. Less likelihood for alignment and visibility and transparency
5. Ultimate disappointment from top management
6. Stress, and jobs on the line because it turns out to be true, you didn't really know what you didn't know.
7. Heavy compromise necessary to get something, anything to completion
8. Project fatigue. The project stops and no one wants to see it recommence. No-one wants to do a project ever again
9. The vendor’s employees are scrambling late into the evenings to get more work done, because unreasonable promises were made
10. The business gets limited value and gets it late or never.

1. Requirements are gathered from all users as part of a “Sprint 0” discovery.
2. Your project is rolled out iteratively (perhaps every two or three development sprints each of two weeks duration) reducing the risks of project failure from poor user acceptance and management.
3. The initial Sprint is focused on helping you prioritise these requirements and testing these against the original scope of work.
4. Your project is kept on track with daily stand-up meetings and fortnightly Sprints, during which a potentially shippable product is delivered and tested.
5. The disciplined Scrum approach means you know exactly how your project is progressing.
6. Promotion and self-esteem for those responsible
7. User acceptance testing is built into the agile implementation approach. Our contract with you is to demonstrate precisely what we commit to build in any two-week sprint. Quality, potentially shippable software increments that can be tested by you, the customer.
8. Progressing to the next stage of implementation once each Sprint is complete and you’ve signed off that body of work ensures roadblocks are identified and resolved and user issues are dealt with before they become ‘show stoppers’.
9. The business transforms itself.
10. The IT department – if involved – takes on a new and noble reputation

As you can see, Scrum leads to better managed projects and better business outcomes, provided your consulting partner retains the discipline of Scrum throughout the project.

Because of the precise nature of managing Scrum projects, it provides a much clearer idea of how long each stage of the project will take and therefore, when your new product or service is likely to be shipped.

The real test for your consulting partner though is the level of discipline and passion they have for the process, and the professionalism they apply to the task.

Just about everyone throws Agile into the conversation these days. But where others revert to lesser methods, once project challenges arise, ProQuest uses the Scrum approach in order to meet those challenges with the rigorous problem-solving framework it provides.

So next time you are considering a fixed price contract, you may want to ask yourself, “how much is this really going to cost me?” and “If it goes astray, what will be the impact of delivering too little too late?

How useful did you find this article? How much does it reflect your experience of IT project implementations?

What we offer companies serious about improving their business performance

ProQuest Consulting is dedicated to implementing Salesforce and ServiceMax for companies needing to make a generational switch to the world’s leading cloud-based software platforms.

We’ll ensure you benefit from the implementation of these solutions to enhance the performance of your business and differentiate your services from your competition. Using our agile approach to project delivery, we ensure an efficient and rapid implementation of Salesforce and ServiceMax and a reduction in your project risk. 

[1] Source: http://thisiswhatgoodlookslike.com/2012/06/10/gartner-survey-shows-why-projects-fail