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Fixed Price – success or failure?

December 4, 2012

Fixed Price  – success or failure? Fixed Price  – success or failure?

Fixed Price

Quite often Fixed Price cooperation model is considered to be the most suitable among business owners, as it allows to control project’s budget. In this article we will analyze why most of the clients prefer to work using this business model. Is it really a cost effective solution, corresponding quality-to-price ratio? Or in fact it can lead to a project failure?

Before the project start a customer usually has quite superficial understanding of what the final product should be. And it has nothing to do with the professional skills of a team that works out requirements. As practice shows, neither customer nor contractor knows what functionality will be required several months after the development had started. In large projects, a client provides a list of specifications relevant to the given period of project implementation, which does not exist in any case of the product’s final version.

The success of a project, using Fixed Price cooperation model, usually depends on three factors: cost, terms of implementation and requirements to a product.

As a rule, implementation period and product requirements are clearly defined at the very beginning. These are the factors a customer assumes to be the most important and, along with the fixed price, considered to guaranty project success. However, nothing but detailed specification is the most important factor on which the final product depends, and, therefore, the success of the project in general.

How detailed can the technical requirements be? More often than not, all attempts to give accurate specifications face one and the same problem. Working on large projects, the development team gets better understanding of customer’s expectations with every passing day. As a result, the project manager has to maneuver between the initial task and the changes, that come from the customer throughout the development process.

But if the cost is fixed, why not to settle requirements? In this case, the final product is at risk of becoming completely useless, since the original requirements presuppose only approximate vision of the final product.

So, speaking about long term projects, Fixed Price is not the best variant for both the customer and the contractor. This cooperation model perfectly fits small projects, with clearly defined requirements and medium technological complexity. These are the factors we recommend customers to pay attention to, because these are specifications that directly affect the final cost of the product. Besides, the more detailed specification is made, the more accurate evaluation of the project will be done.