Fixed Price
Project Cost Structure.
Project cost pricing is a fixed price method of engaging with a procurement expert to work on strategic, development or transformation projects which may be too complex or in depth for the client to manage internally.
Fixed pricing is a good fit for projects which can be scoped out and defined with a good deal of accuracy. For this type of project to work for both parties, the tasks involved and the timing for the project need to be outlined with relative certainty to provide a fair representation of the cost the specialist will incur.
Unlike Gainshare, fixed cost is better suited to projects where the benefits may not simply be cost saving in nature but more intrinsic and intangible, however potentially more valuable to the client in the long term.
As with Gainshare, the benefits of this type of payment structure are wide ranging and can have significant impact on the client, benefits include:
Fixed Transparent Cost
Although fixed cost does not provide a guaranteed Return on Investment, it provides the client with a clear understanding of the cost of the project before committing to proceeding. For fixed cost to be effective there needs to be a strong level of trust and transparency between the specialist and client. To help when looking to begin a fixed price cost project the below points should be considered and followed:
- The client needs to be honest about the true nature and parameters of the desired project including any desired goal or outcome. Without this information available upfront when the specialist is defining the parameters of the project, the resulting proposed cost and timing may be inaccurate and result in discrepancies later or the need to re-cost.
- The specialist should be open about the work and cost involved in completing the project, this may appear counter-intuitive, however by providing open and justifiable costings and timings the client may be more understanding about the true nature of the work involved.
- If there is a change to the scope or timing of the project by the client, it is important to relay this information at the earliest opportunity. By being open and upfront about the reason for any change and the true nature allows the specialist to re-assess their focus and limit the potential impact and cost of the change.
Sharing of Risk
Fixed price costing is normally seen as a middle ground regarding risk participation with both parties to the agreement sharing elements of the risk. This type of arrangement can provide a more amenable solution for the client to engage with a specialist for projects with high priority whilst maintaining a good level of risk control.
Each party to the agreement takes on elements of the risk associated with the project:
Client - Through this type of agreement the client has visibility of the cost of the project upfront, however, this is an agreed cost at the commencement of the project and may not provide a full return on the investment made. Subsequently without close control and a clear understanding of the reason for the project and the achievable goals, the client may become frustrated or disenfranchised with the project.
Specialist - With a fixed cost project, the emphasis is on the specialist to ensure they have all information and data required and they understand the client’s expectations to enable them to accurately scope out the project. Without meaningful information at this point, or if the specialist mis-interprets a part of the brief they may find the project over runs or becomes more complex than initially anticipated.
Any costs associated with a time or work overrun is at the specialist’s expense unless the reason for the overrun is due to a focus or scope change by the client.
How SCB Procurement Solutions Support Project Cost (Fixed Cost)
We understand the pressures on finances in the modern business environment and we make every effort to reduce the burden on companies with the foresight to address potential strategic opportunities to develop their internal or external supply chain.
Fixed price projects allow our clients to understand the work involved in potential projects and maintain financial transparency whilst seeking to maximise all tangible or intangible benefits to their organisation.
We pride ourselves in proactively supporting companies who believe aspects of their supply chain model needs development to compete with changes in their market sector or the macro environment. SCB Procurement offer advice and support to organisations and business leaders to help guide them towards a best practise solution. To help with this we always seek to protect our client’s finances and ROI by offering project payment structures outside of the “norm†of Payment for Performance or hourly rate projects.
