April 2, 2010

Another Way to Handle the Fixed Bid Dilemma

In the beginning of each Project there is The Contract. The terms of that contract will have consequences, some anticipated, others unanticipated, for the project’s cost, for the project’s timelines, and, too often, for design decisions. Many companies enforce a fixed-bid contract when engaging with outsourced software design and development. But traditional fixed bid contracts treat software development and design in the same way they treat an ongoing manufacturing process, as if there is a knowable, previously established fixed cost to developing something new and original. The fixed-bid creates a bias toward software development processes that encourages strict adherence to an initial design, rather than a bias towards the best design for the client’s needs. This mindset also increases the likelihood of missed deadlines and cost overages.

There are strategies that can be employed to accommodate the request for a fixed bid without giving up design flexibility. For example, with one of our larger clients, Waverley utilizes a multi-stage strategy where we divide a large deliverable into several smaller fixed-bid milestones. Each milestone is one to two months of work and begins with a short design phase.  Working together we create purchase orders for a time and materials fund to cover design and analysis work.  The upfront T&M work allows agreement on the upcoming milestone and fixes a bid with a clear plan that is achievable with minimal risk.

Minimizing schedule risk is one of the biggest factors in creating fixed bid contracts that make sense. For this approach to succeed, it’s important to establish trust, so the client can see a long-term plan to provide a deliverable across several smaller-stage milestones. This is especially true for Agile development. The project overview can be discussed up front with goals for each milestone and a general understanding of what resources and budget will be consumed to satisfy the long-term requirements of the buyer. With each milestone, risk is reduced and the working relationship benefits from the confidence built up during the T&M design phase.