'Hello, Anon.
In my experience, the "best" way to price is totally dependent upon the situation, so I wouldn''t just make it a strategy to "always bid Fixed" or "always bid Hourly rates" (often called "Time and Materials" or "T&M").
There are some advantages and disadvantages to either approach.
Fixed Pricing, from the vendor''s perspective, should have a built-in contingency, usually between 20-30% of what it would cost on a T&M basis. For example, if you''ve estimated that the job will take 1000 staff-hours, and your billing rate is $150/hour, your *estimated* T&M price would be $150K. If you wanted to bid that same job as a Fixed Price effort, the "price" you''d present to the client would be 1.2 or 1.3 times that much -- $180K - $195K. So, the client is "paying extra" to ensure that the job comes in at a Fixed fee -- in this case, no more than $195K. In a T&M job, they''d have to pay the vendor for the actual hours worked to get the job done, which could in fact exceed $195K. So, many companies WANT the vendor to bid Fixed -- it ensures that the maximum budget (for the agreed scope) will not be exceeded. However, it also ensures that the vendor will receive the full amount agreed, even if they end up finishing the job with a lesser amount of effort -- thus increasing their profit margin.
The key from the vendor''s perspective is to precisely define the scope of work AND to have an accurate means of estimating the cost -- otherwise, they''ll under-bid and potentially be stuck doing more work than is profitable. If the vendor is very good at estimating, then fixed pricing is usually more profitable. If they''re bad at it, they''ll lose money.
From a customer''s perspective, their own requirements should be as precisely defined as possible. Also, an effective change management program NEEDS to be in place with the vendor. If the customer is smart, they''ll solicit multiple bids, and will NOT specify whether the bids should be T&M or Fixed. Let the vendors show you the approach(es) they''d take, and that will help you to:
- refine your requirements
- validate your own estimates
- decide whether Fixed or T&M (or some variant thereof) will be the best way to "manage" the engagement
A side note: Smaller projects are always preferable when dealing with outside vendors its a lot easier to manage a discretely scoped project than to attempt to Guestimate that year-long (or longer) Project. Make the first phase of the project (say, Requirements) a Fixed Fee engagement. Let the results of that first phase drive the estimates and scope of the next, rather than trying to define and estimate, in detail, on day-one of phase-one.
Yours in Ramblin
