Idea in short

A fixed price contract, also called a lump sum model, is ideal for engagements with a clear scope, established delivery methodologies and a stable set of requirements. Fixed price contracts are most suitable for long-term projects and those that have a high value to the client organization.

Pre-requisites

For fixed price contracts to deliver both, the client and the consulting firm, both meet certain criteria. Both teams should have a good grasp of the expected outcomes. The requirements, expectations and success criteria should be clearly defined in the contract. A conducive working environment and mutual trust are obligatory. Both teams should be conscious of each others’ capabilities and the skills they bring to the table. Usually, the consulting firm furnishes extensive amount of details on project delivery before the client awards the contract.

Client perspective

Clients prefer this type of contract because it transfers the onus of delivery to the vendor i.e. the consulting firm. Often, government contractors use this contract to choose the best price the market has to offer. Fixed price contract also allows clients to control the cost and transfer the risks to the vendor. Thus, vendors who follow the fixed-price contracts have legal obligations to complete the contract.

If vendors don’t deliver on the agreed upon scope, they may incur additional financial liabilities. Hence, as a vendor, make sure that you thoroughly read the contract’s terms and conditions. The contract may entail stipulations that penalize you for your failure to deliver.

Advantages

This contract type allows your customers to correct any mistake during the initial phase. Moreover, if you can deliver the scope within the budgeted cost, you may well easily earn more through such contracts. However, this type of contract also comes with several disadvantages. Change requests disrupt the flow and order of the project. Moreover, it can also lead to customer dissatisfaction.

Good practices

When using this model, ensure that you clearly enumerate the requirements (dependencies), deliverables and timelines (milestones). This not only helps avoid misunderstanding and conflicts down the lane, but also bolsters client trust.

Caveats

Managing fixed price projects required a lot more professionalism. As the service provider, you bear all the project risks. Ensure that you build in adequate buffers in your cost calculations to absorb these risks. Scope creep and changes are difficult to absorb without additional costs or reduced profits.

Therefore, ensure that you deploy rigorous project monitoring, control and alert mechanisms to track deviations from the planned execution plan. Likewise, ensure that your team understand and implements the required Quality Assurance (QA) and Control (QC) mechanisms. Controlling costs is crucial in the successful delivery of fixed price projects.

Compensation

As a consulting service provider, you may setup payment terms with your client. You may trigger payments at periodic intervals or when you achieve certain milestones or intermediate deliverables. In this case, you may want to invoice your client, a fixed percentage of the total cost at each interval through the course of the entire engagement.

Summary

SERIES: Contracts