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Can fixed-price projects protect against ERP project failures?
Are fixed-price projects more beneficial than traditional hourly consulting engagements.
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3 Answers
Fixed price projects can limit the amount of monetary damage in a project failure, ERP or other functionality. But nothing can protect you from failure if you don't get the right vendor.
What fixed price procurement can do on the positive side is to filter out some of the bidders that depend on the ability to increase their billings if things don't go as they have told you.
On the negative side, however, fixed price procurement can put the vendor in the position of facing cost overruns and trying to get well by taking unwarranted shortcuts with your implementation. That can be just as bad.
Perhaps the best approach to fixed price vs. T&M procurement is to look at the level of detail with which you can describe your requirements. If you really can provide a statement of work that covers everything likely to happen in the project (and this is much more difficult than you might think), then perhaps fixed price is a safe bet. If there are significant questions that cannot be answered until the project is in process, then fixed price will 1) cause smart bidders to inflate their bids to cover the ambiguities or 2) to bid low to get the job and cut corners if things go wrong. Either way, you don't the best situation.
As a general strategy, for projects that appear to have areas of ambiguity, a rigorous upfront analysis, preferably by a third party analyst, is a good approach. Look in detail at the project and describe the requirements and questions that will be faced. Another approach I have seen used successfully is to issue a Request for Information (RFI) instead of a Request for Proposal or Quote (RFP/RFQ.) A RFI can ask vendors for their best judgment on your needs without asking them to price up front. You can then talk to those whose responses look promising, integrating what you learn so that you may then either issue a more informed RFP or go right to negotiation with a vendor if you find one that fully meets your needs. I wrote about this part several years ago (http://www.intranetjournal.com/articles/200112/cm_12_19_01a.html )
No...fixed price projects are bad decisions for both the customer and the vendor. The failure of a project to stay within budget doesn't necessitate the failure of the project as a whole. Instead, take an incentive approach. The vendor bids the project at $X and 6 months. Tell them you will pay them $1.1X if they get the project done in less than 5 months and watch the darn thing pop up all of sudden. The number of billable hours become less important when a premium per hour is earned by doing a good job - quickly. Recent road construction projects in my area have demonstrated that protracted projects disappear and new roads are suddenly available when the meter is reversed (i.e. you make less money per hour the more hours you take to get the work done).
I agree with Steve and Barry regarding the fixed price benefits. A fixed price project does not mean that you will not be plagued with scope change requests, in fact in my experience the fixed price project is even more likely to have change requests!
I will say though that the fixed price project will provide more control in limiting unnecessary or superfluous change requests. Since the vendor is responsible for delivery with the exception of scope change requests, this sets up the critical nature of the change management process. This should be viewed as a good thing for the project as the oversight will require a greater understanding of the changes necessary for success. The client will be required to evaluate and approve changes identified by either the client or the vendor and will then evaluate and approve the change. This will provide early warning to the project spinning out of control, as long as the change management process is effectively managed!
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