I am not a fan of fixed bid projects in general. That distaste is such that I have turned some down in the past. However, sometimes we need to step into one of these arrangements. It is worth considering the actions we need to take to keep such projects fair to all parties. Here are some lessons I have learned from personal experience and from others that have entered into these agreements. The successes and failures are excellent teachers for this billing strategy.

Fixed Bid Struggles

I want to start the discussion by highlighting some of the weaknesses of this process that we want to overcome. The first is that it pits parties against each other. It is in the best interest of the customer to get as much into the project as they can while the provider will want the least in it. Ideally, there will be a “just right” amount of work in the project, so the work that is done matches the compensation. This goal highlights another weakness. The vendor will want to “pad” the price to cover overages while the customer will focus on the lowest cost. Thus, any time the work is not highly defined, the two sides are hedging their risk for the work-compensation ratio. Finally, changes are difficult for these projects. Every little change will potentially require the vendor to be paid more, and the customer will want to argue against that. This situation often triggers conversations about what is a “bug” and features that were implied or assumed.

Reduce The Competition

The first and foremost issue we want to remove is pitting the parties against each other. The best way to resolve this is to get the pieces defined and set in place from the start. We want to set expectations for everyone involved. Our challenge lies in reducing (or at least identifying) the risks involved in a project. Thus, it is best to “chop up” the project into smaller pieces that can be easily defined and assessed. That leads to milestones. I think these are the key to successful fixed bid projects. Likewise, the are others that agree with me.

Milestones are an excellent way to reduce a complex project into smaller, more manageable pieces. Likewise, each milestone has reduced overall risk and allows the parties to make adjustments as the project proceeds. Each step along the way will have a set of deliverables, a time frame, and a related cost. This process can still work within a greater fixed bid budget for time and cost. However, it will highlight issues sooner in the process so the parties can open discussions before one or both are in an untenable situation.

The Sum Of The Parts

The “just right” amount of work balanced against the requirements can be challenging to assess with a large project. When the work is simplified into a series of milestones, it becomes easier to find that balance. The focus for both functions and meeting them becomes smaller and more likely to comprehend. For example, think about your favorite application that has multiple top-level menus. Most Word Processing and Spreadsheet applications fall into this category. If you were to assess how that application meets a set of requirements, it is far easier to do so a menu item at a time than trying to look for features across all items. This thought process is not rocket science; we need to consider that adding items adds complexity and expands focus. This challenge is no different than discussing a single decision as opposed to a series of them. There are flow and side effects that come into play far more often in an extensive system than those milestones. These can make it harder for all parties to do their respective jobs.

Managing Changes

Change requests are always a challenge as the project progresses. There are bugs, requirements changes, and scope changes that can fall into this category. Typically, bugs are part of the fixed amount while the other two may require a fixed addition. I have found it helps to start with a bid and expectations that includes some minor changes. When you take this approach you get to avoid “nickel and dime” issues where large amounts of time are spent haggling through each item. When this happens, a project can slow to a crawl. There is always the option of pushing changes off until a project completes. However, there are times when that is not realistic. Of course, adding in some “buffer” for changes can make it hard to do an apple to apple comparison of project bids.

Changes are more of a challenge when they are done in a granular matter. The better your ability (on both sides) to group these tasks into a bundle, the less the headache. When you avoid minute details of tasks, you avoid long conversations with little benefit. This also allows for “buffer” required per job to be rolled into a total buffer amount that will often be far less than the sum of the individual items. There is a form of averaging of risk that can be applied. Think of it as being able to make fewer estimations and risk assessments. It is not much different than an insurance company assessing risk across a large number of customers rather than having to spend time on each individual.

The Bottom Line

When you think about an hourly rate or time and materials, it is similar to milestones of an hour (or the time block paid). However, there are not always going to be a deliverable for those milestones other than time spent. Ideally, we have two goals. The first is to complete the overall project. The second is to complete the steps required to reach the primary objective. We can use milestones to bundle together hours of work into a deliverable and reduce risk on both sides. Each party just needs to stay open to the idea of adjustments along the way.