Project Managers often try to avoid fixed price contracts because of their reputation for being impossible to manage. Requirements were poorly defined. You can't obtain the right resources to deliver in the contracted timeframe. There is constant miscommunication between the project team and the client over how expectations differ when on a fixed price project versus a traditional time and materials contract. So how can a project manager succeed when placed on a fixed price contract?"
Fixed price contracts involve setting a fixed total price for a defined product or service to be provided. The seller must deliver a defined work-product to the buyer at a predetermined price. Based on that relatively standard definition of fixed price contracts, project managers should be able to expect that their projects have:
- Requirements that are defined before the project starts
- Well defined change control process
- Fixed project scope
- Project goals that are achievable
- Contract is not subject to price adjustments
- Delivery dates that are fixed and penalties for missed deadlines defined
- Quality standards are established and agreed upon between the buyer and the seller
- Appropriately assigned team structure and skills
- Agreed upon project assumptions, out-of-scope and acceptance criteria
- Clear understanding of client expectations
In reality, most project managers will tell you that fixed price projects don't always go as prescribed, they each come with their own unique set of challenges. If you were to ask a slew of Project Managers about what challenges they experienced on fixed price projects, you'll get a slew of different answers:
- Requirements evolve and change…A LOT
- There are significant differences between documented and actual practices/processes
- Lack of project documentation
- Vague scope and undefined roles and responsibilities
- Project modifications create unanticipated costs and scope creep
- Unpredictable impact of external factors (subcontractors, vendors, competing business initiatives)
- Inconsistent and ineffective project team and client collaboration and communication
- Time required for re-scoping, reevaluating, re-estimating, reporting and documenting is not allocated
- Inaccurate estimates (time and resources)
- Lack of customer product owner
- Client resources have competing priorities – necessary resources/expertise not available
- Client not sure what they are asking for and consequentially what they are going to get
- Current documentation expected to suffice as new system specification/requirements
- Customer organization is not talking amongst themselves
- Client manager does not manage the business "not blocking" for the team
- Customer does not understand the impact of their decisions
- Lack of pre-established processes (change control, engagement plan, burn rate tracking)
- Project team spends time working deliverables that were not part of the original project definition or business requirements
And the list goes on. I'm sure you have been exposed to some, most, or all of these challenges at one point or another. Regardless of each individual experience, what should be noted is that if these challenges are not managed, they can present risks and issues to any fixed price project. So how are these challenges managed and risks mitigated? Implement the 5 best practices for PMs on fixed price projects:
- Focus on the up front work. Thoroughly understand the contract, know your deliverables, put your change control process and engagement plan in place, get your communication plans and tools and set up your scope management, risk management and resource management plan.
- Focus on partnerships and client relationships, communicate and create transparency.
- Closely track your burn rates, project finances, risks and scope in order to preview problems earlier and have the hard conversations sooner.
- Document and get sign off, create an impenetrable paper trail and project library
- Define scope - confine the requirements by identifying boundaries from all sides and manage scope creep back to business goals and objectives.
Following these 5 best practices will lead you to succeed on your fixed price projects.