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A Fixed Price Contract for Your Project: Pros and Cons | Video

A Fixed Price Contract for Your Project: Pros and Cons | Video

What are the pros and cons of doing fixed price contract for your project?

That’s the question I answer in this video, from the point of view of a contractor providing projects for their clients.

This video is safe for viewing in the workplace.

This is learning, so, sit back and enjoy

Principally, the pros and cons of a fixed price contract are what you’d expect…

It’s all about risk.

Things will be fine if you can do three things:

  1. Price your project accurately,
  2. Put in a sound contingency and an appropriate profit margin (if you are working for a return), and
  3. Deliver to time, to budget, and to specification.

If you do all three, you will retain your contingency and make your planned profit. All will be good.

But, that doesn’t always happen.

  1. If you fail to price accurately.
    Probably due to poor estimation practices or faulty starting assumptions…
  2. If you do not put in enough contingency.
    Nor a sufficient profit margin, if you are managing commercially…
  3. If you then deliver over budget, beyond deadline, or outside of acceptable specification…

Then you will have to bear all of the costs of financial and schedule over-runs, and putting right the products.

Your client sees pros and cons too:

Pros of a Fixed Price Contract

Financial certainty, which makes planning easier and is good for governance. Some organizations rightly choose to minimize risk and so prefer to pay a premium to do so. This is particularly those in the public and not-for-profit sectors.

But beware the naive client who wants their cake and eat it. That is, they want a fixed price and a low price too. Don’t ever succumb… That way leads to too much risk.

Cons of a Fixed Price Contract

Cost. A project manager would (and should) cost in a premium for the risks above. This can be either as a greater contingency, or a bigger profit margin.

You should not double up though, and increase both. That seems to me to be rude. It’s often a case of double counting or profiteering. But you’d only get away with it if your pricing lacks transparency, and that’s poor practice.

Along with risk, come other things…

And from these, I’d single out stress. Fixed price contract projects tend to be more stressful. This is because, as a project manager, you are bearing more risk.

Now, stress can induce errors. So this can easily become a downward spiral. The reality of fixed price projects is unrelenting pressure on schedules, budgets, and delivery.

The Truth Buried in the Whole Assessment

Anyone who has followed my videos and writing will recall this. I often say that the triple constraint won’t solve any of your problems, but it will make your choices clear. Fixed price projects force the choice. You have an immovable constraint.

So, ultimately, the pros and cons come down to one thing…

  • The Pro is that a fixed price contract gives you absolute focus on cost.
  • The Con is that you may sometimes need to trade this for schedule, quality, or scope.

For More on Project Cost Management…


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About the Author Mike Clayton

Dr Mike Clayton is one of the most successful and in-demand project management trainers in the UK. He is author of 14 best-selling books, including four about project management. He is also a prolific blogger and contributor to ProjectManager.com and Project, the journal of the Association for Project Management. Between 1990 and 2002, Mike was a successful project manager, leading large project teams and delivering complex projects. In 2016, Mike launched OnlinePMCourses.

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