by Karen M. Kroll

One Way to Avoid ERP Cost Disputes

Jan 17, 20122 mins
ERP SystemsIT Leadership

How about trying fixed-cost contracts? Here are some of the pros and cons.

Given the number of disputes that arise from an ERP implementations — Lumber Liquidators, CareSource Management Group, Tesco Bank, Whaley Foodservice Repairs, and the City of New York appear on one list among the casualties — the appeal of fixed-cost contracts seems pretty obvious. Both sides agree on a number, and the threat of eye-popping cost overruns or debilitating schedule slips should be reduced, if not eliminated.

Eric Kimberling, of independent enterprise resource planning consultancy Panorama Consulting Solutions, points out, perhaps not surprisingly, that he’s seen an increase in the number of fixed-cost ERP contracts over the past few years. That’s particularly true among small- to mid-sized companies, he adds. They want to avoid the problems and project creep that has doubled (or worse) the budgets of some ERP implementations.

Unfortunately, fixed-cost contracts still have their own shortcomings; they just differ from those inherent in contracts that are tied to the time and materials used within an implementation. For starters, vendors operating on a fixed-rate contract tend to more tightly define the scope of their work, and may push more tasks to the client company, Kimberling says. For instance, they may expect the company to handle testing or data conversion.

There’s nothing wrong with this, of course. But it highlights the divergence between the interests of the vendor and those of the client company. “The CFO wants a fixed bid and predictable costs, but the vendor is incented to minimize the scope of the project,” Kimberling says.

In addition, it’s not unusual for the vendors to bump up their budgets by 20% to 30% in a fixed cost contract. Basically, they’re covering themselves against unexpected delays or problems. As Kimberling points out: “You’re making a trade-off; you get a fixed bid, but the costs are inflated.”

A thorough review of the proposed contract by an expert should bring these issues to light. In addition, no matter the type of contract used, the client company should expect to take a hands-on role in managing the project. Strong controls are critical to mitigating the risks inherent in both fixed-cost and time-and-materials implementations, Kimberling says. “Some CFOs think you can sign a fixed-bid contract and walk away. That’s not the case.”