Fixed Fee: The Best Use of this Contracting Strategy
Are you leveraging Fixed Fee contracting strategies where it can create the most value for your organization? Find out here.
The Fixed Fee contracting strategy defines a fixed amount for payment at the beginning of a contractual engagement. By its nature, this contracting strategy is inflexible, but has its place in creating value in the supply chain.
Why would you use a Fixed Fee contracting strategy?
Fixed Fee is best utilized when:
- the requirements of the engagement are completely defined up front,
- the requirements are clearly documented for expectations management, or
- the project has been completed several times in the past and effort to complete the engagement is well known.
The Fixed Fee strategy shifts the risk of additional costs or timeline delays to complete the defined scope to the supplier. While this could drive an increase in the original estimate from the supplier, there is a perceived comfort from those that manage project and company budgets that the cost is known.
What are the challenges of Fixed Fee Contracts?
While there can be comfort in a known budget for an engagement, Fixed Fee contracts are not without their challenges.
Much like the perceived comfort of a known budget, companies may believe that oversight of the supplier's work is not required, or at least is decreased significantly, by internal resources. This could lead to finding out later that expectations were not well understood, resulting in delays in the project timeline. If timeline delays are a concern, this could present challenges despite the fact that the cost would not necessarily increase.
As noted in the previous section, the risk of additional work to complete the original scope is transitioned to the supplier. To provide the supplier with a bit of protection, they add a risk premium to prevent a loss on the work performed. If this is acceptable to your business, then this may not be a specific concern.
While this contracting strategy can shine if the scope is completely defined upfront, it is often utilized when the scope has some ambiguity still remaining. This can often lead to additional clarification on requirements or scope creep, requiring a change order to be created. The more often this occurs, the benefit of a defined budget is reduced.
Fixed Fee contracting strategies are often utilized on projects that have been completed in the past. However, without details about the direct charges necessary for completing the work, it can be challenging to ensure the estimate is based on historical actuals.
Sometimes, the Fixed Fee contracting strategy can become a company default. If this is the case for your organization, you may be spending more time defining the explicit scope of work to be accomplished when another contracting strategy could provide greater benefit to your organization for that engagement.
What can help me manage Fixed Fee Contracts?
The first suggestion is to leverage internal resources to provide the appropriate oversight for work performed to reduce the risk of timeline delays.
Second, consider leveraging a Contractor Management Software, such as Track. While the strategy is based on a fixed priced paid in progress payments, milestone payments, or a one-time payment, leveraging a site’s Proof of Presence solution, or a mobile alternative can help to provide the historical data to help with validating costs, challenging change orders, and scoping efforts in the future.
Finally, consider how your organization is leveraging the Fixed Fee contracting strategy. How often is it utilized and for what types of work? Are there opportunities to increase or decrease its use based on the engagements of the past? Leverage this analysis to change behavior in the future to create value for your organization.
