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Monday 28 May 2012

How Not to Lose Money on Fixed Price Work

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Fixed price work seem to be a problem for many of you. In recent discussions with a variety of professional services businesses, ranging from accountants, through consultants, to IT businesses it is clear that for you fixed price work is rarely profitable, and often a source of problems and most times a situation where you lose money. Yet despite this you seem to ignore your experiences and through gritted teeth continue to offer fixed priced work to clients.

Fixed Price tariffs: are they still a good deal?
Fixed Price tariffs: are they still a good deal? (Photo credit: uSwitch)
Lets be honest fixed price work is very appealing to your clients and prospects; it gives them confidence because they get a firm price for delivery of a project (web site) (IT system) or a combination of services ( accountants, consultants). So why is it so easy to lose money on this type of work? Simply as a result of three problems, first most businesses and especially professional services businesses aren't sufficiently detailed in their analysis of what work needs to be done, secondly as a result of poor communication and management of client expectations and last a lack of commercial awareness. Following a few simple steps you can turn these troublesome children which lose money into profitable business with happy clients.

The first problem is is not having a handle on the amount of effort involved in providing the service you are offering. This is often the root cause of you losing money fixed price work. Why? because you tend to be too optimistic about how long it will actually take to complete the work. Also as there is no clarity on what effort it will take because there is no detailed scope work. Not doing this basic estimating first creates a problem for you because you cant clearly define the limits of what you will do for the price and as a result your customer can drag you into doing much more work than you expected but all within the original quote for the fixed price work.

The second problem comes from that dangerous word "assume". That is you assume that your customer understands the basis on which you are quoting and how much effort you are going to put into your fixed price work. Your customer by contrast assumes that you can read his mind and understands his assumptions, which of course only come to light when you think you've finished the work and he thinks there is a lot more for you to do. So stop putting yourself in a position to lose money by writing down exactly what you will do and to what level of detail. This is a particular problem if you are a professional services business because it is very rare for you to consider the depth to which you will undertake a service rather just saying it will be addressed. So don't assume anything, let you client or prospect know IN WRITING clearly and up front what you will be doing and in how much detail . Then get them to sign that off. Once you've done this you have an agreed baseline.

The third problem is lack of commercial awareness. I'm surprised how many professional services companies for example will offer fixed price work more cheaply than you would charge on a time sheet basis. This makes no sense; ask yourself this. Who is taking the risk, well in fixed price work it is you! so you should be charging a premium not a discount. For many of the larger professional services businesses this would be anything from 15 to 33% depending on the level of risk. 

The other issue is stage payments. So many professional services businesses offer something like 50% up front and 50% on completion. Its great for you to get 50% up front but stupid to leave 50% of the fees on the table when you will have completed all the work. It is particularly bad because it puts you in a week negotiating position as when you get to the end you'll really want that 50% so you'll end up giving in to every little demand and variance your client wants to include and believe me with a commercially astute client there will be plenty of them. I suggest, actually i'd like to insist, instead that you ask for stage payments that give you 80-90% of your fixed fees before work is completed. For example 30% up front 30% when design or other milestone is agreed 30% on delivery of the work and 10% after acceptance or when the report etc is accepted.

Its easy not to lose money on fixed price work, you just need to be a little more organised in your approach to your prospects.

Exigent Consulting provides specialist services for High Growth Business Business Turnaround, and Mentoring to the Small and Medium Business. We help business owners improve the profit performance of their business.