‘Fixed Price’ ERP/COTS Projects – Are They Worth It?

Sponsoring software projects can be very overwhelming. Understanding and documenting initial problems, business requirements, prepare RFP/RFQ, deciding vendor/product and so on. Throughout this process there is often one major concern, “Can we deliver the project under the approved budget?”. Organisations often try to mitigate this risk by opting for ‘Fixed price’ quote.

But, does that really solve the problem?

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Let us see….

Benefits of Fixed Price

Simple invoicing: Software vendor sends invoices to you based on agreed Payment schedule, so, there are no surprises for you!

Reduced Project Management effort on your end: Most of the project attributes (scope, cost, payment schedule, milestones, and approach) are determined in early stages of the project. Therefore, Project management (Client) effort can be substantially low in comparison to equivalent ‘Time and Material’ project.

Limitations of Fixed Price

Risk Transference is not free: Fixed price projects are clear examples of risk transference. You are transferring risk of budget overrun to Software Vendor by fixing price of the project. It comes at the cost. Vendors will (and should) allow buffer of additional (say 20%) project budget before agreeing to fixed price.

It comes with Waterfall flaws: To determine fixed price of the project software vendor relies on upfront detailed analysis, heavy documentation and generally follow strict Waterfall methodology. It means that it also comes with all the flaws of Waterfall. Ultimately, they add up to project risks:

  • Your business is changing and so are your requirements: Business and its requirements are changing more rapidly than ever before. Therefore, there is often risk that the end-product (Solution) you will receive may not meet your requirements.
  • Added complexity due to upfront Analysis and Design: You may not know your complete requirements with all the varied scenarios, exceptions in business processes unless your team has done thorough business analysis before RFP process. Further, there is often gap between your understandings on business requirements and how these requirements actually translate to the solution (in the boundaries of selected COTS software).
  • Change requests can be expensive: If you are proposing fundamental structural changes in the system later in the project, it can be very expensive. Due to upfront analysis and points discussed above, there are often chances that you have to raise few Change requests to cover gap between your requirements and the proposed solution.
  • Considerable time and effort is spent on contractual agreements: Rather than focusing effort on business problems and solution, a lot of effort has to be spent on agreeing contractual documents between yourself and the Software Vendor.

To conclude, Fixed price is not the silver bullet that will resolve all budget related issues. Careful consideration should be given to alternative options.

Fixed price project may work well where:

  • Requirements are clear (non ambiguous)
  • Selected software vendor has implemented similar solutions successfully at other sites/clients
  • Your business is flexible to adopt and change business processes according to selected software, where possible

Few action items for you to consider:

  • Rather than fixing entire project, fix price of tasks that are simple, tangible and where scope can be clearly defined without much effort. For example, install software on client infrastructure, configure company set-up, training project team etc.
  • Take initiative to learn software navigation, functionality, tool-set upfront. During initial stages of the project (Analysis), get your team to analyse (in detail) how the selected software can satisfy your requirements. Then, take informed decision, if it is worth fixing the price of the project.

Finally, it is a fun journey! Learn and share your learning with others!

With that note, I would like to invite you to comment on your experiences!

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