I'm a new PM in a PM role with a new company (new to me...the business is 50 years old). They treat 95% of all projects are sold as Fixed-Fee projects. But, they are treated as Time & Materials.
For example:
- Every project is assigned an internal spend, and we manage to this. That makes sense. However, information about our budget (not raw dollars) is communicated to the client in status calls and reports.
- If we get close to our budget, we approach the customer for approval to invoice for the overage...to which they invariably respond "I thought this was a fixed-fee project."
Couple of Key Facts:
- I am not involved in the scoping. This is because only about 10% of what is pitched ever becomes a project. I'm working on this, as this is an obvious problem.
- Scoping is rushed...see above.
- Our projects are relatively low dollar, short timelines, and rapid turn over. As a result, the organization has not invested sufficiently in risk management, change control, and (again) scoping. I'm also working on this.
- The management team is open to listening to my ideas, but there is organizational resistance to moving away from Fixed Fee projects.
- About 1/3 of projects go over budget. Saving Changes...
When I read: "I thought this was a fixed-fee project.", my first thought is what does the contract say? If it is, why do you even report budget to the customer? Your internal spending is irrelevant to the terms of the contract.
If it is FFP, I would consider how you develop your pricing. 1/3 going over budget means you are planning inadequate reserve. FFP is the most risky to the performing organization so you are eating all the overage. You shouldn't allocate that reserve to your team while managing the project or they will spend it. Think of it like cost plus incentive. If you don't use the reserve, you profit more because it is baked into the cost. If you have to use the reserve (or more) that may cut into your profit margin but hopefully not put you in the red. Saving Changes...
I'd agree with Keith that this situation does not sound ideal for a true firm fixed price approach and a cost plus incentive might be a better option.
Another alternative if there is no wish to move off fixed price bids is to provide an overall ceiling estimate, but have each phase or deliverable as a separate fixed price contract. With a shorter time horizon, uncertainty should decrease and the actuals are likely to be closer to plan.
I agree with Keith: if it is truly a fixed price, why do you even report the status of the budget.
If your contract is fixed price, then it is fixed price is fixed price. You need to put in a cushion. If that cushion is too high, you may lose the contract. If too low... well you know. It is a fine art. .... and it is business as usual for many companies, including ours. What I would suggest though is that the PM should be involved in the contract negotiations. ( even if only in the background: Marketing would tend to low ball the contract, the PM may highball) Saving Changes...
Anonymous
I am the author. Thank you for the replies. Your incredulity is shared.
Nowhere on the actual proposal are the words "fixed fee." However, they are sold by the sales staff as fixed fee. The terms in the proposal do reference the need to rescope should any of the project assumptions change. The assumptions are laid out. However the assumptions are often very wishy-washy with ambiguous terms that leave us open to interpretation. Again...this is an issue that I'm working on. Saving Changes...
Vijay SuryavanshiProject Manager - Engineering| RECARO Aircraft SeatingPlantation, Fl, United States
As I understand you are getting involved with scoping only now. Knowing the entire scope is important to estimate the project cost accurately. Also, to do a better risk management I would look at lessons learnt in the past projects and see what caused the extra cost for the project. And account for this going forward and mention this in your risk management. The T&M is only a fixed rate in a project with your vendors. The rest are variables and you must estimate it better based on scope, risk management and lessons learnt and all deliverables required by customer.
Also, my suggestion is to use a good baseline project which was successfully completed and compare it with another which exceeded budget and time so you develop better estimation for your future projects and increase your chances of success.
That said, about 1/3 of project do in general (these are big projects and not the size that you are doing) go overbudget or time. If you have to achieve 80 -90 percent accuracy in project management, you have to be a project champion ! Saving Changes...
Adela TataruSenior Project Manager| Self EmployedVancouver, British Columbia, Canada
I guess this happens very often in the services industry. A lot of clients prefer fixed price because it's predictable, and generally speaking, and there are fewer surprises along the way. The fact that the vendor did not price it correctly it's not their concern...
It seems that your company does not do a thorough analysis of project costs and is more focused on selling at any price to clients. It usually happens because the Sales team is disconnected from the Professional Services team, and the sales objectives are disconnected from the reality of projects... In order to show the need to readjust contracts and ensure profit is made on projects, I would suggest doing an analysis of past projects and their profitability. And try to show what a T&M scenario on these projects would have changed concerning profitability. If it shows that there is much more money to be made, then I am pretty sure your company will adjust the selling terms (either readjust the fixed price approach or clearly set the scope or set specific conditions, etc - there are many possibilities). Saving Changes...
Adela is absolutely right. In tech consulting, systems integration and software development for example this pattern is pretty common. In these industries "fixed price" does not mean the final price is truly fixed, simply because it's rarely feasible to define a highly complex outcome in every detail when the price is quoted and it often suits both customers and vendors not to attempt to do so.
What a fixed price contract means in such circumstances is that detailed negotiations about what is included and what the customer has to pay extra for are deferred until a later date (fixed+negotiated). Generally speaking, both parties understand this. Even if they don't always acknowledge it openly they still build contingency costs into their respective estimates and assumptions. The relationship can turn difficult if the purchaser doesn't understand (or professes not to understand) that some elements of the included costs will be subject to negotiation.
One alternative to fixed+negotiated is to quote both fixed and T&M price options that the customer can choose from. T&M typically works out cheaper because the vendor doesn't need to include any contingency cost and if an iterative approach is taken then the delivery risk can also be minimized.
The fixed+negotiated price approach has its place, however. It's a well-practiced business model that can be used to advantage by both vendors and customers. Where a vendor has an ongoing relationship with a customer for example then it may be very common to accept a loss on one piece of work that is balanced by a more advantageous outcome on another. Saving Changes...
