Why do clients prefer Fixed Bid Projects?

In one of my previous articles, I covered various contracting options available within the IT services space and discussed its pros and cons. Today I am going to present how Fixed Bid projects are different in IT as compared to other engineering industries, why would IT clients still prefer Fixed Bid Projects and how this model is attractive enough for Service Providers.

Before going deeper into this, let’s first understand the definition of a “Project” and what does “Fixed” constraints mean from Industry perspective.

As per PMBOK (Project Management Book of Knowledge) chapter 1 v 2022, 'a project is a set of activities to be performed to create a unique deliverable (product or service) in a given duration'

Creating a unique deliverable is the key for this to be called as a project. Every time when we initiate a project, we deal with different set of unique input variables (new team members, unique requirements and unique sequencing of activities) hence the outcome is also unique.

If we were to perform the same set of activities time and over to create a similar product, like we expect in assembly lines, it’s called operations. Car manufacturing, newspaper, book printing are good examples of operations. (Although Industry 4.0 is moving towards smart manufacturing that has a huge focus on Mass Customisation but this topic is for some other day)

Creating a new house, a new flyover, a new highway etc they all are example of projects. Similarly creating a software product, application, modernizing an application from legacy code etc they all fall in the ambit of projects.

Since creating a deliverable in a unique way is key (as its the first time team is creating it), its quite difficult for team to visualise the end state of the deliverable in IT services. That's the biggest constraint team to even size it accurately.        

In an industry like civil construction, manufacturing etc it's possible mainly due to its methodology. Typically designers, architects are hired to create detailed design, 3D model etc to help stakeholders visualise the project outcome. After a go ahead on blue prints/designs, the project is put into the execution mode.

But its different in software industry. Even if UX designers do a great job of creating user journeys, wires and visual designs to help visualise the product, team discovers new things during the course of project that may influence the design, tech choices or feature list etc that may in turn result into the change in the project size.

So is it possible to freeze the design of the end product in software industry or is it even desirable? I would say ‘No’ and 'No'.

It’s quite difficult to visualize the outcome due to its inherent nature of being software. The goal of the project is create a product that’s usable and scalable and hence it may not be the right thing to freeze the design in today’s fast changing world. It’s a thing of past when people would execute projects using waterfall methodology and end up creating something at the end of 24 months that’s half usable. ?Today’s software industry methods allows to execute projects using agile ways and address the continuous changes iteratively to make a product that’s more usable, scalable and extendable.

This brings us to the point that if we don’t know exactly how will the end product look like, how does IT services size this for Fixed Bid and why do clients still expect Fixed Quote?        

For service providers it’s a competitive world. Some smart consulting organisation have developed a set of capability, org assets, tools and techniques to size the project with the available information and apply their domain expertise to identify the hidden risks during the sizing exercise. They also bake in appropriate buffer to de-risk themselves and yet be aggressive in pricing to outbid others in RFPs (Request for proposals) process.?

Some service providers walk an extra mile and commit certain outcomes as part of Fixed Bid RFPs. ?They have come up with Risks and Rewards model & Outcome based variable fee model alongside Fixed Bid options using which they not only show a long term partnership intent but also end up achieving some good upside from these deals. We will go deeper into some of these models in one of the upcoming article.

For clients, they clearly see the advantages of

• Getting to know the ballpark estimate of the initiative for their budgetary alignments
• Transferring a big portion of execution risks to vendors
• Minimizing the cost overrun during the project

So when clients have clarity on project goals and have a broad sense of features and functionalities that is needed by their business and end users, they would like to follow this path of RFPs for Fixed Bid. ?        

And those clients who are in the R&D stage and exploring the tech choices to firm up their business models etc they would prefer hiring specific skillsets from the market or vendor’s team on T&M.

And now two important call-outs...

• Fixed Bid contracts does not mean that everything is fixed in it. It’s a project where team is expected to operate within fixed constraints and for the right and justifiable reasons, there is always a scope for negotiation for additional budget to execute non-negotiable change requests.
• Don’t mix Fixed Bid contracting with waterfall methodology. There is a way to create a guard rail around your scope and assumptions and apply any agile methodology lime scrum or lean agile etc. We will discuss more on this in upcoming articles.

?As always, leaving your comments on how useful this is, will encourage me to write more on this topic. Happy reading!