Founder in Eleven

As a founder in a services business, it is hard to say “no” to a customer.  With a project or large consulting engagement in play, a common customer request can be for a fixed-bid arrangement.  Typical client requests can sound like:

“We want to make sure that your team is incented and shares the risk to hit this project’s budget and timeline.  A fixed-bid arrangement allows our team to be confident that your team is focused on achieving good budget and time-frame results.”

While customers and procurement would push for fixed bid, at Technology Services Group (TSG) we evolved to never do fixed bid, which made us very successful in working with customers for more mutually beneficial time-and-materials arrangements.  TSG moved to this approach over the early years because we found that fixed-bid would often impair our long-term customer relationship regardless of the outcome of the project.  This post will discuss the issues with fixed-bid in regard to long-term customer relationships, and how to address customer cost and budget concerns within time-and-materials arrangements that include change control.

Author’s note – it would be helpful to read our articles on Estimating and Weekly Status Reporting before this article.

Fixed Bids – The Project Management and Transparency Issue

Fixed bids cannot provide management with the needed flexibility and adaptability over the course of a project to address the impact of change-over-time without altering the contract, which is otherwise a difficult negotiation process.  With time-and-materials arrangements, services firms can adjust the scope of the project and resources necessary as it progresses, without having to renegotiate the terms of the contract.

Time-and-materials arrangements also provide greater transparency and accountability for both the services firm and the customer. The customer is able to see exactly how the resources and time are allocated and can make informed decisions about the scope and budget of the project. The services firm, on the other hand, can demonstrate the value they provide to the customer and can be held accountable for the resources and time used. This can lead to a more collaborative and trust-based relationship between the services firm and the customer.

As an example of the project management issue, often times a fixed-bid project will include contribution from customer resources that are not exclusively working any one project.  Over the course of the project, those resources might not be available due to other customer critical issues associated with other projects or support responsibilities.  In a fixed-bid arrangement, the customer and services firm must renegotiate how to replace that customer resource contribution—a difficult discussion to fit into a fixed bid.

Fixed Bids – The Incentive Problem

While a fixed bid can appear to “share the risk” with both the customer and services firm, too often a fixed bid can set up incentives for both parties, making them work in their own best interest and sacrificing long-term customer relationships.  In dealing with assumptions tied to our “Estimates are always wrong” post, customers are incented in getting as much done as possible to maximize the value of their money.  Services firms are incented to do as little as possible and as quickly as possible to maximize profit.  These incentives can result in difficult negotiations for dealing with scope creep or assumptions that are proven wrong over the course of the project. Both scenarios are more likely when it comes to interpreted design specs, scope creep and customer side-staffing discussions as presented previously. As an example, typical IT projects include integration into other systems.  The uncertainty of attempting to estimate the effort of this integration for an outside party is extremely difficult.

Fixed Bids – The Cost Issue

For a fixed-bid arrangement, services firm will add a contingency (20+ percent) to the cost of a fixed bid in order to account for the additional risk taken by the bidding firm given all of the unknowns contained in the estimate.  TSG would routinely add 20% to all our estimates as contingency in time-and-materials arrangements.  In a scenario where the estimate proves close to correct, a customer might be paying for the full contingency in a fixed-bid arrangement as opposed to none in a time-and-maaterials.

TSG would highlight that, for clients asking for fixed-bid, we would add 30+ percent based on our experience with clients that asked for fixed-bid arrangements.  

Time-and-Materials with Change Control

If presented correctly, time-and-materials with change control can be a benefit for both the services firm and the customer.  Addressing the earlier customer statement:

• Incentives – In typical projects, some of the assumptions can be proven wrong over time.  With both the customer and the services firm focused on a successful long-term relationship, services firms are motivated to hit the budget and timeframe to make the customer successful.  With the greater transparency of a time-and-materials arrangement, both the customer and services firm can collaborate to adjust components as the project progresses.
• Shared Risk – Services firms are looking for a long-term relationship with customers.  Every project will focus on making the customer successful so that the firm can participate in future projects.  The services firm is always aware of the risk that an unsuccessful project will result in the end of that customer relationship and the inability to get another project from the customer.
• Cost – Presenting a time-and-materials arrangement with change control estimates can reduce the contingency of a fixed-bid arrangement.

Fixed Bids – Why Just Say “No”

While we talked about how to work with a customer to convince them to do time-and-materials with change control rather than fixed-bid, sometimes the customer or procurement will push hard for a fixed-bid.  Too often, IT services firms might hear:

“We will need a fixed-bid from you or we will be giving your work to your competitor.”

Many IT Services firms will cave to this type of pressure rather than just saying “sorry, we can only offer a time-and-materials bid”.  In my 24 years of running TSG, we eventually moved to only time-and-materials for some of the below reasons:

• Relationship – Being forced into a fixed-bid can give an early preview of the type of relationship with the customer.  How will the customer behave when it comes to scope creep?  Will they assign their best resources to the components they are committed to completing?
• Competition – Will the client really give the work to our competition for just the fixed-bid reason, or is this a bluff?  If our firm hasn’t been able to show our value and differentiation, do we really want this customer?
• Negotiation – Part of the dance with customer/procurement is just negotiations.  Success in negotiations requires patience to wait out demands from the other side.  (Look for an article soon on “If you aren’t willing to walk away, you aren’t negotiating”.) 

Time-and-Materials with Change Control

Time-and-materials arrangements can be managed in the same way as fixed-bid with a change control process to allow for both the client and the services company to work together as the arrangement progresses.  The term we used at TSG was “Plan the Work (Estimate), Work the Plan (Change Control)”.  Components of the project management include:

• Detailed Bottom-Up Estimate – Developed in the proposal stage of the arrangement, the estimate includes detailed tasks, estimated activity, and sample assigned resources along with corresponding rates.  The project management team starts with the estimate as a baseline for tracking activity.
• Project Status – As we presented in “Weekly Status Reporting”, the manager will track activity each week for the project against the estimate including activity, estimate-to-complete, and variance per detailed item concerning as to whether the item is on, under, or over estimate.  Activities that weren’t estimated are added as scope items if the team approves.  The project manager will also report against the timelines for the project to be able to add resources if timelines are not being met.
• Change Control – The services company and the customer meet to review the status and make changes using a change control process.  The services company cannot make changes to the scope or estimate without the approval of the customer.  The customer cannot make changes to the scope or estimate without going through the change process, either.

Typically, TSG would follow the client’s project management requirements or leverage the client’s time reporting tools.  Regardless, TSG would always report back to our original project estimate internally as this is how our managers would be evaluated and used as data within any quality-assurance or risk-mitigation program.

The important point for both client and internal team is that all changes regarding a project are to be documented and reflected back to the original estimate.  Weekly statuses confirm decisions made as well as generate plans for the upcoming week.  Managers would work on making sure each status reported how much was spent and how the project was faring against the estimate in the body of the weekly status report email with the detail attached.

One quick note, time-and-materials with change control is not the same as time-and-materials not to exceed.  Lawyers can interpret “not to exceed” as both a fixed bid with a cap.  It is recommended not to use any reference fixed-bid or “not to exceed” in any time and materials arrangement. 

Conclusion

If customers are concerned about the risk of the project, fixed-bid arrangements are something they will often request to get the services firm to share this risk.  Good services firms can counter with time-and-materials arrangements with change control as alternatives to fixed-bid and highlight how the arrangement can mutually benefit both parties in forming a long-term trusting relationship fostered on transparency and accountability.