Fixed Price Model in Outsourcing

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Fixed Price ModelPlaying ball with a remote team you should be always on pins and needles. Since you are far away, there is almost nil possibility to have a full control over the development process. Of course, you can always check the outcomes of the work, but how do you know that a great deal of time you spent was not simply wasted? How to be sure that you remunerate exactly the productive activities and not constant coffee breaks and smoking time-outs?

The most important thing is to have a clear understanding on all the terms and conditions before the project is considered to be outsourced. You should be clear about what deliverables you are going to pay for and which price rates are to be applied. Of course, all the details must be documented.

The fixed price model, also known as fixed bid model, of outsourcing is a perfect solution for one-time or short-term projects lasting not more than a few months. It is necessary that the outsourcing service provider receives a detailed and defined scope of work specifications describing the final outcome of project delivery. As a buyer, you should also be clear about the options to be considered because, in most of the cases, such contract type does not imply changing the tenor of development.

For all that, it does not mean that you are not allowed to incorporate revisions in an ongoing project. If such a need arises, you can create an additional agreement and re-estimate the final price in order to effect the desired result.

Fixed Price Model is a silver bullet for those who are interested in the off-the-peg solution and do not care much about the means used for providing it. This type of corporation assumes no active client’s involvement in the workflow. The process is entirely controlled by the project manager employed by the outsourcing service providers.

When to choose a Fixed Price Model.

If your answer is “YES” to most of the questions below, then the ‘fixed price model’ is precisely what you need.

  • Is it possible to fully describe the scope of work and possibly the stages of project mile stone achievements?
  • Is the complete project duration not supposed to take more than a few months?
  • Can you entrust the project management functions to the representative of the development team?
  • Is it possible to agree on the terms of the workflow review?
  • Is it unlikely that you make any significant changes to the final version of the project delivery?

Pros and Cons

Before taking a final decision, consider Fixed Price Model’s advantages and disadvantages.

You are going to benefit for the following reasons:

  • No over-payments: The entire amount is agreed in advance.
  • No Supervision: Coordination of the development process is carried out by the service provider. If desired, the buyer may also participate.
  • No Turn-ups: You have a signed statement which describes the terms and defined timelines.
  • No Distrust: There is no need to worry whether the working hours are used efficiently. Service providers are usually motivated to deliver in the shortest time frame possible with no compromises on the quality.
    Low Risk: All in all, you play it safe. If the project delivery does not meet the agreed SOW specifications, buyers still have a right to ask for revisions or not to pay for it (if the agreement specifies).

In any business model there are downsides as well. In case of Fixed Price Model these are:

  • Time for Preparation: Be ready to spend few days up to 2-3 weeks documenting all the requirements and deadlines.
  • Minor Control over the Process: Of course, you can make your adjustments, however, management is mainly executed by the service providers.
  • Lack of Communication: This model does not involve frequent interactions between the buyer and provider. Nevertheless, it does not mean that you will be in the dark about what is happening.

Each pricing models and both pros and cons. To get maximum benefits, when choosing a fixed price model, it’s important to see if it fits your project size and complexity.

A fixed price model is usually chosen by public and not-for-profit organizations for small and medium size projects. Strictly defined requirements, and clear acceptance criteria in a fixed price model allows you to count on the fixed budget and fixed deadline time and plan your company activity accordingly with minimum risks for surprises.
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