Higher Costs
There are a sea of problems with the FFFS contract. For starters, vendors will calculate costs using a higher hourly rate than they would quote on a Time-and-Materials (T&M) contract. For example: if a vendor would normally provide resources at a rate of $50 per hour to be price-competitive on a T&M contract, is now using a higher rate of $60 per hour to calculate estimated costs. The customer doesn’t see the hourly rate on the FFFS contract. That means that the requirement estimated to take 100 hours to complete, starts off costing the buyer $6,000 instead of $5,000. But wait. We said that the FFFS contract transfers all the project risk onto the vendor. Transferring risk is not free. Typically vendors charge a risk premium of 10% to 100% for fixed-fee projects depending on the nature of the project. That means that the same requirement that would cost $5,000 on a T&M basis, will now cost anywhere from $6,600 to $12,000. Ouch!

More time spent up-front
Remember, on Fixed Fee, Fixed Scope projects, the customer and vendor agree on a predefined list of requirements. Because this list of requirements is essentially a part of the engagement contract, they need to be documented and outlined in meticulous detail — word-smithed to avoid any hint of ambiguity. All this takes time – time wasted before the project even starts. Some buyers think that because this is time spent by the vendor during the “sales process”, before the project starts, that the time and effort spent by vendor resources defining, documenting and estimating scope is free. Wrong! It is embedded in the price of the contract.

continue to: The Truth About Fixed-Fee, Fixed-Scope Contract – Part II –>>

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