Fixed price projects seem to be a problem for many of you. In recent discussions with a variety of professional services businesses it is clear that for you fixed price projects are rarely profitable, and often a source of problems and most times a situation where you lose money. Yet despite this you seem to ignore your experiences and through gritted teeth continue to offer fixed priced projects to clients.
Let's be honest fixed price work is very appealing to your clients and prospects; it gives them confidence because they get a firm price for delivery of a project (web site) (IT system). So why is it so easy to lose money on this type of work? Simply as a result of three problems, firstly most businesses and especially professional services businesses aren't sufficiently detailed in their analysis of what work needs to be done, secondly as a result of poor communication and management of client expectations and thirdly a lack of commercial awareness.
Following a few simple steps you can turn these troublesome children which lose money into profitable business with happy clients.
The first problem is not having a handle on the amount of effort involved in providing the service you are offering. This is often the root cause of you losing money fixed price work. Why? because you tend to be too optimistic about how long it will actually take to complete the work. Also as there is no clarity on what effort it will take because there is no detailed scope of work. Not doing this basic estimating first creates a problem for you because you can't clearly define the limits of what you will do for the price and as a result your customer can drag you into doing much more work than you expected but all within the original quote for the fixed price work.
It is fair to say that most IT businesses do not or rather cannot analyse their work in a detailed fashion. This is critical in any fixed price quote because if you don't know what you are going to do how can you price it?
The second problem comes from that dangerous word "assume". That is you assume that your customer understands the basis on which you are quoting and how much effort you are going to put into your fixed price work. Your customer by contrast assumes that you can read his mind and understands his assumptions, which of course only come to light when you think you've finished the work and he thinks there is a lot more for you to do. So stop putting yourself in a position to lose money by writing down exactly what you will do and to what level of detail.
So don't assume anything, let you client or prospect know IN WRITING clearly and up front what you will be doing and in how much detail. Then get them to sign that off. Once you've done this you have an agreed baseline.
The third problem is lack of commercial awareness. I'm surprised how many companies will offer fixed price work more cheaply than you would charge on a time sheet basis. This makes no sense; ask yourself this. Who is taking the risk, well in fixed price work it is you! So you should be charging a premium not a discount. For many of the larger professional services businesses this would be anything from 15 to 33% depending on the level of risk.
Managing Change is vital so you must have a rigorous change control procedure as all those little can you just do this small change add up to big changes and as we know even a small change can have far reaching consequences to the system and be very expensive to implement. Get your client used to the idea that he submits changes and you will price them up, so before he agrees he knows what it will cost.
The other issue is stage payments. So many businesses offer something like 50% up front and 50% on completion. It's great for you to get 50% up front but stupid to leave 50% of the fees on the table when you will have completed all the work. It is particularly bad because it puts you in a week negotiating position as when you get to the end you'll really want that 50% so you'll end up giving in to every little demand and variance your client wants to include; and believe me with a commercially astute client there will be plenty of them. I suggest, actually I'd like to insist, instead that you ask for stage payments that give you 80-90% of your fixed fees before work is completed. For example 30% up front 30% when design or other milestone is agreed 30% on delivery of the work and 10% after acceptance. That way you have lock in most of your fees before you get to the area of acceptance which is often the stage when the "I thought you were going to include" conversations happen. Now with 90% of your fees in the bag you can be a lot more realistic about what is and isn't included in your work.
Whilst it is not easy to make money on fixed price project, you just need to be a little more organised in your approach to your prospects.
Laurence Ainsworth is the founder of Exigent Consulting a UK based business consulting organisation and is a specialist in managing the challenges of High Growth, Sales & Marketing and Mentoring to the Small & Medium Business Sector.
Contact us to see how we can help you improve your company's performance.
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