FPP – Estimating Fixed Price Projects

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I posted a blog a few days ago on Fixed Price Projects (FPP – A Frightening Acronym). FPPs frighten me because part of LLP Group (a part I’m happy to have sold) worked with the wonderfully open-ended Microsoft Dynamics business software products. We sold, scoped, estimated, and executed such projects poorly, to the extent that we made no margin at all, sometimes on hundreds of days of consulting, even whilst satisfying our customers. Our consultants and developers were no doubt excellent, but our sales processes and project management skills were insufficiently sophisticated and cautious.

Because of this I’m wary of FPPs, even if I know that they can be done well, can be controlled and can be profitable. To that end, I try to make sure that everyone in the company is aware of the risks and how they might be mitigated.

My last notes were about the Sales process. Here are some thoughts about Estimating.

estimating

Estimating

Estimating is a process that must involve both the sales and the consulting/development team.

It’s a time-consuming business. But FPPs get off to a bad start if we calculate estimates poorly on the basis of incompletely understood requirements, and half-baked solutions. Even ten free days up front might save hundreds of days later.

Of course, it’s the sales team that has to sell the project and who, in conjunction with management, must decide on price (for a defined scope), but our sales and management team MUST listen to what the consultants have to say. If they say they must know more about the client’s requirements, then the sales team must provide them with more. Never be tempted to think ‘Well, if I add another five days or so, that’s bound to be enough’. It isn’t.

And ALWAYS add contingency to your estimate. (And then more.)

In the end it is a commercial issue as to whether you knowingly ‘sell’ fewer days than you know that you need to execute the project. Whether that is commercially wise or foolish has nothing at all to do with the deadly sin of starting a project with inaccurate estimates of how much time the project will actually take you.

What if your estimate is insanely too low, and you discover that once you’ve started the project?

Well, it’s important when creating an estimate to make your assumptions explicit. This isn’t a slippery way of avoiding commitment, a trick that you’re playing on the customer. No, it’s an honest statement of the basis for your estimate. If it turns out that there are material facts that you’re unaware of, then you’ll be glad to be able to go back to the customer and ask for more time. And make sure that you make it clear that it isn’t your fault that you didn’t ask. You need to include a statement like this one in your proposal:

This estimate is based on materials provided by the customer and discussions with [named individuals]. Whilst we have built a certain level of contingency into our estimates to deal with the unexpected, the following assumptions are material, in that if they are incorrect our estimates may be materially wrong in either direction. These assumptions are [examples]:

  • In valuing your inventory you use only one method of valuation, weighted average valuation in local currency in conformity with statutory tax regulations
  • In valuing your inventory you value it only in one currency
  • You have no need for lot tracking of purchased, intermediate or final products
  • Etc’

 

And very importantly…

  • Your staff are motivated and committed to the process of implementation and will provide timely support as required
  • Your staff will be available for the time that we have estimated is required of them’

 

If possible you should build the estimation process as a first step of the project itself, or present this as a project stage where estimates and assumptions are confirmed. If necessary, give some free days to this, since your risk is greatly reduced by it, and you have a chance to demonstrate competence.

But if you do this it is also important that you build into your contracts an escape clause.so that both parties can terminate the contract or renegotiate it if the estimates or assumptions turn out to be incorrect.

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5 thoughts on “FPP – Estimating Fixed Price Projects

  1. FPPs – Mitigating Some of the Risks – Adam Bager

  2. FPPs – More Pitfalls to Avoid – Adam Bager

  3. FPPs – Yet More Thoughts on What Could Go Wrong – Adam Bager

  4. FPPs – Getting Paid and Getting Out – Adam Bager

  5. FPPs – You Need ‘Commercial’ Project Management – Adam Bager

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