Working with fixed-cost estimates

A contact on LinkedIn recently pinged me asking a question about fixed-cost SOWs…

I am starting out a small practice as an independent consultant. A potential client of mine wants to send me a Statement of Work and wants to ask me to commit to a fixed cost estimate.

Have any of you had any problems/reservations/issues stemming from accepting work on a fixed cost estimate?

First off, I am thinking I want to see if they have any established procedures for change order requests and how my pay would be handled if a change in scope is needed.

Any thoughts/comments would be greatly appreciated.

My response…

In my experience, scope creep is a very common problem (and most clients have little or no ‘established procedure’ that they have a good handle on). Someone asking for a fixed-price estimate in many cases is driven by 1) an internal accounting standard that make variable-cost projects a pain, or 2) a fear of their own lack of understanding of what the project should take.

So (y)our response can swing to one of a couple extremes or somewhere in the middle.

A short proposal/SOW leaves you with the most exposure. The benefits could be 1) you take some business to build credibility and your own process, even if margin’s not good, and 2) over multiple projects, you figure out an average cost of delivery and against which you determine margin for future quotes, knowing that some clients/gigs will vary in profitability on an individual basis. Finally, 3) it shortens the buying barrier… you’re not asking them to chew on a lot prior to signing.

…which gets back to scope creep… often services clients don’t even know all the right questions to ask, so they discover things along the way (or other influencers get involved), and their ‘ask’ changes.

The other extreme is that you write an SOW that is watertight, covers all your bases, and requires some comprehension. Benefits are that you’re covered…but risks are that it goes to legal and extends your sales cycle, or is held up by someone who hates reading contracts, or stalls because the buyer who wants you gets scared and won’t touch it (or then routes it to legal).

Here’s my rule of thumb – I tighten up the SOW more and more as my risk goes higher and higher, which generally is a function of price and trust. Have you worked with them on previous projects and know what to expect? Is “missing” your estimate by 20% several hundred dollars or several thousand dollars (especially if you have out of pocket hard costs)?

So to answer your question, ‘have I had any problems,’ the answer is yes… (leading to my own practices outlined). As for ‘change orders,’ I let a simple email exchange serve as an appropriate approval in all except the highest dollar cases.

Best of luck!


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