I’ve listed so many risks associated with Fixed Price Projects (FPPs) that you may well have decided to avoid them entirely. That would be a mistake. If approached carefully, and with reasonableness on both sides of the contract, an FPP can be both profitable and the beginning of a long and mutually beneficial relationship, based on trust and understanding.
As well as all the other risks inherent in and FPP there is also the risk of not getting paid for it, or not being paid on time. This is a much greater risk in FPPs than in time and materials projects.
Not what you want to be doing…..
Most fixed price projects involve payment terms based on phase completion or the delivery of components of the project. There are many risks in this:
- A client may unreasonably withhold confirmation of delivery or completion of a phase, and yet allow other phases to continue
- A client may halt or suspend the project
In both cases you may have difficulty in obtaining payment.
Include a clause such as this in your contract:
‘Where payment is dependent on acceptance of the completion of a phase or upon delivery of stipulated components of the project you may withhold acceptance if grounds are reasonable. In such cases it is essential that you put in writing your reasons for withholding acceptance. You also agree to provide us with immediate opportunity for clarification and remedy. If you do not do so within two weeks of delivery or completion of a phase then you agree to pay us as if you have accepted the phase or delivery. Furthermore you agree that other phases and deliverables may be suspended until payment is made. You also agree that during the period of remedy, however long, and until payment is made, later phases of the project will be delayed and deliveries suspended.’
It’s also vitally important that you build in to your contract and into your project plan an (albeit early) option to escape.
If you can persuade your customer to engage in a serious design phase for the project so that final estimates can be made on the basis of clarified requirements, then do so. You will save money and reduce risk, even if you pay for half the days yourself. You will probably have put forward an initial estimate, of say 100 days, and you may find that you arrive at a new estimate of 200. In this case you must make sure that both the customer and you can extricate yourselves form the contract. You must have a phrase such as this:
‘We have made estimates on the basis of the discussions we have with you, and assuming certain circumstances, intentions and needs. Those assumptions that might materially affect our estimates are documented. Following an initial design and estimation phase of the project we may find that some material assumptions are false, and that other circumstances are not as we understand them now, and in this case we may revise our estimate. Both you and we reserve the right to withdraw from the project at this stage, or to renegotiate the scope of the contract.’
Your client may try to argue that in this case he has spent money for nothing, but you should and can very reasonably argue that he will have obtained a very much more precise idea of what an implementation project involves, and what can be done in the specified time. This represents real value.