Fixed price software projects

At my workplace we have quite a few fixed-price projects. Projects involving the government, local administration or official institutions are just about always like this.

Now, to be clear from the start, I’m not a big fan of this kind of projects. Why? Because I think they are fundamentally flawed. They have you (as the provider) and the client pulling in opposite directions from the very beginning.

It already starts when you submit your offer. You have to offer a competitive price. So you’ll offer the very minimum that covers the requirements of the client. If you don’t, and try to think of a fancy solution, you’ll be too expensive, and won’t win the project.

Once the project starts, it’s just a matter of time until the first “In Scope or Change Request” discussion with the customer. For them, everything is part of the agreed scope, so they don’t need to pay. You’ll need to push in the opposite direction. You can’t just play nice and do every change they request for free, cause you’ll lose money.

Sometimes you’ll have a great idea on how to implement a feature in a nicer/more maintainable/more user-friendly way, but it’ll cost more. How do you bring this idea to the customer, especially if they are very strict on sticking to the budget, or are very tough negotiators when it comes to project scope? You risk another of the discussions I’ve mentioned above.

That’s not all. End-to-end, same project, same scope will be more expensive with a fixed price model. The risk is higher for the provider, so you’ll calculate a higher margin, to make up for that risk. Of course there is also the risk that you grossly underestimated, and will have to pay out of your pocket to get the project done.

So why are they used so much? Well, it’s only natural to want to know what something will cost you, before you buy it. If you go to the shops, you’ll look at the price before putting the item in your shopping cart. If you want to build a house, you’ll want to know if you can afford it. Same goes for software projects. But there’s a catch. Software projects are very dynamic. You may agree on a scope and a price, and 1 year later, when the project is finished, end up with something that doesn’t match your needs any more. So you’ll have kept the project within budget, but ended up with something you can’t use.

In the end, what a fixed price guarantees, is that the customer will spend the agreed price, and get some software in return. Which may or may not match what they actually wanted.

Unfortunately the rules in the public sector won’t change soon, so these projects are a kind of  necessary evil, that we’ll keep encountering for a long time.

One thought on “Fixed price software projects

  1. To “hide” IT costs. Politically it can be easier to admit that a project costs $500,000 to implement than the fact that they’re paying you $400 an hour to do so.

Leave a Reply

Your email address will not be published. Required fields are marked *