Blog | 10.14.2014

Are you profitable in fixed price projects?

A fixed price project makes the vendor deliver a pre-defined work product for a fixed price. There is the potential to create that truly rare occurrence in projects, a win-win situation for the vendor and the client both.

  • The client gets a certain budget and more often than not a reasonable estimate of the time period needed for delivery.
  • The vendor gets a degree of flexibility in the allocation of resources and in return for the higher risk they assume often get a higher than normal rate.

That being said there is enough research out there to suggest that a large percentage of such projects end up being unprofitable and end up decreasing workplace productivity for the vendor and ultimately causing heartburn for the client as well. In this situation what are the resource utilization variables you should be tracking to know whether your fixed price project is profitable or not?

  1. The flexibility to deploy people on the project only as they are needed is a double edged sword. While members get moved into the project team when needed the other part of the equation is moving them out once their role is done. Unfortunately projects are dynamic in nature and don’t always follow the plan – what often ends up happening is people get allocated to projects as projected in the original plan but in actual fact before they are needed leaving them with not much to do. An eye also has to be kept out for the allocated people to move out of the project as soon as their role is completed and no later.
  2. Especially in the more complex projects there is a tendency for needs to evolve and the deliverable grows in size one small change at a time. In itself each change may be small but all of these add up over time. It is critically important to track which specific activity each member of the project team is engaged on at all times to increase organizational effectiveness and to guard against effort being expended on non-remunerative activities caused by scope creep.
  3. Apart from the people working on the project it is critically important to keep track of costs. The need is to do this all through the duration of the project – there is sometimes a tendency to do this only as a post-mortem when management feels a project has been especially unprofitable. The other evil here is not considering the indirect costs – the total “damages” include both the direct cost of materials and consumables and the indirect costs associated with infrastructure use also.
  4. Knowing where to call an end to the project is the other key piece that fixed price projects struggle with. The criteria for what constitutes successful “acceptance” should be defined and agreement secured for that criteria from the client well in advance. The criteria should be objective and unambiguous to prevent any disagreements when the time comes for the project to come to a close. The project ends when the pre-determined criteria is achieved – the client’s expectations are met and the project team and other resources can be re-deployed to other jobs.

In a nutshell for fixed cost projects the organizational skill that has to come to the fore is project management – keeping close track of all the people and resources working in the project and the tasks being performed could well make the difference between a project delivered on budget and schedule and one that ends up overshooting the deadlines with unacceptable cost overruns.