Fee Estimates: Don't Be Penny Wise & Pound Foolish

24 October 2013 Innovative Technology Insights Blog

Sometimes it pays to pay a vendor to develop a fee proposal that it will stand behind. Although the word “fixed” is a critical part of the term “fixed fee,” many fixed fee bids from service providers – particularly with respect to IT services – are subject to change. Sometimes by a lot.

Consider the following example: A few months ago, one of our clients went through an RFP process to hire a vendor to implement a new software system. The vendor that was chosen for the work agreed to a fixed-fee for the work. To the client’s surprise, during the first contract negotiation session, the vendor announced that the fixed fee would almost certainly change. This vendor, like many, based its fixed fee on a host of assumptions that it made during the RFP process, all of which were included in its proposed statement of work. Any change to an assumption, the vendor explained, would change the fixed fee. Suddenly the “fixed” fee was little more than an estimate.

But it doesn’t have to be that way.

One common way to address this problem is to strip the assumptions from the statement of work and restrict the vendor’s ability to use the change order process to increase the fees (for example, by limiting change orders to very limited circumstances when the client has requested a change in scope – i.e., the client decides to implement new functionality not scoped under the original fixed fee). But many vendors – understandably so – are unwilling to remove the assumptions from the SOW or unduly limit change orders. After all, many vendors are developing their pricing as part of an RFP response and are relying on the limited information in the RFP (and the assumptions the vendor made in response) to come up with a price for the work.

We’ve had more success with a different approach: paying the vendor to prepare a revised fixed fee it will stand behind without the laundry list of assumptions. By investing a limited amount of money up front (typically on a time and materials basis) to have the vendor properly and thoroughly scope the project, and prepare a detailed project plan and associated fixed fee budget, both parties win. The client gets a budget that will truly be “fixed” and the vendor gains the security that the fixed fee it quotes is realistic and based on a much more educated understanding of the work involved.

If, after the scoping work is done, the client doesn’t like the proposed fee, it can part ways with the vendor, having lost just the cost of developing the scoping documents, project plan and budget (which is not necessarily money wasted, since the client should be able to repurpose the deliverables when re-bidding the project). In addition, the client avoids finding out mid-project that the true out-of-pocket cost will be significantly more than it anticipated.

Have a not-to-exceed bid instead of a fixed fee? No problem. The same approach works just as well.

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