How project managers can deal with fixed price contracts

Dealing with fixed price contracts can often be a difficult task

Being an independent consultant I have come to like the fixed price contract. For most of my work I fly solo. Occasionally I will hire a trusted friend to assist me if I need a specific skill or talent which I do not possess. In this scenario it is easy for me to manage the work since I am the only person on the job. For project managers it is not always a simple task to manage a fixed price contract. I find that most companies shy away from fixed price contracts.

It seems to me that most companies equate working hours to productivity. The more you work, the more that gets done. While there is a certain logic to that, there are also some schools of thought that indicate that there is a point where increased working hours will decrease overall productivity. Regardless of how much more gets done by working more hours it is certainly true that each person has their own level of productivity. Someone who works eight hours might get as much accomplished as another person working ten or more hours at the same task. But there always seems to be an underlying belief that the person who leaves the office at 5:00 is not as productive or dedicated as the person that stays until 7:00.

Most companies do not have good measurements of productivity and therefore use the number of hours worked as there measurement. They ask people to work 40 hour a week or now 37.5. This they ask even of their salaried employees! It is not until performance review time that people find out their manager’s “perception” is of their productivity. Often this is different from the employee’s perception. This inability to measure true productivity is what makes a fixed price contract so difficult. Most companies don’t have a good idea of costs at a deliverable level.

I wrote in an earlier blog how to use hours worked to equate to value. This is the method which is most often used. But even with that methodology estimating is poor until the organization matures its measurement techniques. Even if the organization is able to estimate work to a desirable level there is another problem to overcome for fixed price contracts. That problem is to create a description of the work to be performed or better stated, the specific product or service to be delivered.

When dealing with internal resources this problem is easier to deal with as you can continuously direct and redirect the person’s efforts. But with a fixed price contract there are legal obligations if the contract is to be modified in any way. Therefore it is necessary to be very specific when defining the delivery requirements in a fixed price contract. This requires a very good understanding of the desired outcome as well as a lot of effort to create the detailed requirements. Can you think of any companies that you work with where you experience this problem?

For the project manager these types of contracts create conflict and stress for the project. Often the project manager is not even aware of the details of the contract as that information is dealt with only at the executive level. For the project manager, getting involved in the contract requirements would be the ideal situation. In most cases the project manager is not offered this opportunity. Therefore it is the duty of the project manager to gain access to as much information as possible related to the delivery requirements for a fixed price contract. Points of conflict

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