When organizations are in the process of evaluating proposal costs, some believe that fixed bids are the safer route; that successful management of large projects is dependent on those types of bids. In actuality, a fixed bid has little correlation to success. If not managed correctly a fixed bid may, in fact, become a barrier within the project.
A fixed bid is an organization’s insurance policy for cost management. Theoretically, a fixed bid project would never go over the stated amount and the costs become predictable. Vendors will typically add an additional 20–40% to the estimate as a hedge against the project going over budget. Vendors would capture that premium if the project is completed on time and with estimated resources. Many organizations believe incorrectly that a fixed bid project moves the risk of a successful project from the organization to the vendor. Project risk always remains with the organization. For an organization to successfully manage project risk, it is critical to:
- Managing to the contract. If not explicitly stated in the contract, it will not be included in the project, leading to challenges if the needs, requirements, or approach were not clearly identified.
- Minimizing detail about the deliverables. If unknowns exist due to detailed requirements, further definition of the deliverables may be necessary at a later time.
- Implementing excessive contract change management. The vendor will accept their financial risk but is usually not interested in accepting the customer’s project risk. Any delays, perceived change of requirements, or even clarifications in analysis or design can result in the vendor submitting a change order. Each change order increases the cost above the original fixed bid.
Determining the benefits of a fixed bid engagement is really an organizational decision. The key point to remember is a fixed bid project does not address the risk of a successful project delivery. In reality effective product selection, a good contract, organizational change management, project management and vendor management are all needed for a project to be successful.