Fixed Price Contracts: Better for Everyone?

David Layton

David / 6 May 2020

I've been a contracting for over a decade, and before that I worked for a consultancy. Daily rates are the norm in the UK, but three years ago, I started something new, fixed price contracts. My motivation at the time was mostly curiosity. Perhaps I just wanted something new.

Today my motivations are different. All my project work is fixed price. The rest, mostly maintenance and consulting, I do on retainer. And I don't think I'd ever go back--not to billing daily, or hourly. Why?

Fixed Price is Less Stressful for the Client---and Me

That might sound odd. Sometimes I do take a bath on a contract because I fail to properly estimate, or more often control, the scope of the project. That said, it hasn't happened in a while, and when it does, it isn't the end of the world.

When things do go wrong, it mostly damages my wallet, rather than my relationship with the client. And at this stage in my life, that's what I want--better relationships, not more money. I want my clients to know I care about them succeeding and be a part of that success.

No questioning my hours. No justify spending X amount of time on something technical that really had to happen. That dissonance is a waste of everyone's time. The client knows that if I did something, it was at the expense of my time, not their money. In fact, there's more trust that what I am doing is for the benefit of their bottom line.

Fixed Price Creates the Right Incentives

Let's take the cynical perspective. When someone takes on a contract at an undefined price (daily or hourly), what are the contractor's incentives? What are the client's? And are they in harmony or conflict?

The income of the contractor becomes fixed for that time, as does the client's burn rate. But what about the project? The contractor has little incentive to give better estimates and help control the project's scope. There is no incentive to finish early; so it rarely happens.

In my experience, contractors, more often than not, make technology and architectural decisions based on personal dogmas, pet preferences, and an interest to learn cool, new things. The only stop-gap to this being the client's discontent, which only comes in the latter stages of the project.

Unfortunately, daily billing is the norm, at least in the UK. Over time standards slip; and this dynamic has faded into the accepted landscape. Over the course of a career, most contracts learn little of the skills necessary to work any differently.

fixed price

An entire industry of recruitment further calcifies our circumstances. Employers, lacking in-house skills in some area, hire experts as temporary commodities through middlemen. At that point, the admitted dilettante has decided major aspects of the project because this arrangement requires the employer to produce a list of skills and responsibilities---all before the experts get involved. Here, I use the term "employer", and not client, because, in some sense, this is disguised employment.

The Better Way

Employment, disguised or otherwise, is not the optimal relationship. By aligning the intensives, business and technology can work together. The experts can make the right choices, instead of the cynical ones, and deliver far more value to the business. Projects can be delivered on time--and frequently early! Shocking, I know. More importantly, they can exceed their original business expectations by staying focused on outcomes.