Science & Technology

Fixed Price or Fixed Bid Information Technology Outsourcing Model

As the name itself implies, this is a Price based information technology outsourcing model and arguably the most mature of models. An earlier article that was published on this site describes all the information technology outsourcing models in existence today.

In this model, a fixed amount of money is guaranteed to the vendor for delivering a piece of work subject to mutually agreed milestones.

 Salient Features

The salient features or key characteristics of the Fixed Price model of information technology outsourcing are as given below:

  • Fixed Price model demands that the scope of work, the milestones and the final deliverables are clearly defined and agreed between client and vendor.
  • Project requirements are very clearly defined at the start of the project.
  • Standard IT operational procedures need to be followed by client and vendor.
  • Periodic reviews have to be carried out throughout the course of the project.
  • Billing is typically done in phases. A standard phased approach is as below:
    • 20% of the total amount as an advance upon award of project.
    • 30% on completion of detailed requirements specifications, detailed design, project plans and test cases.
    • 40% on completion of User Acceptance Testing (UAT) of deliverable
    • 10% on production and go-live.

Example

A Logistics company awarded an Oracle EBS implementation to a vendor for a price of USD 140,000. The vendor submitted a proposal in which the project will be completed in a span of 4 months, with 2 weeks of production support.

Another example of a fixed price contract is the award of a Support & Maintenance contract by a manufacturing company to a vendor who will maintain the client’s legacy applications for a fixed period of 3 years at a fixed price of USD 4.5 million. The billing in this case could be monthly as opposed to a milestone based billing.

Pros and Cons of Fixed Price Model

Pros

  • This is arguably the only model that will provide an accurate forecast of budgets.
  • As it is a fixed price project, it will enable the client organization to get the best return on investment if the estimates have been drawn accurately.
  • Vendors will also be able to make strategic investments into their own technology practices as well as into client relationship management.

Cons

  • The fixed price model increases the responsibility on the part of the client to select the best-fit vendor for the job, thereby adding to the overall risk.
  • Inaccurate requirements, scope and estimates will result in disastrous circumstances.
  • The risk increases as the value of the project increases.
  • The model is not flexible as changes mid-way will be subject to change control procedures, and more often a lot of management time is lost in such exercises.
  • Change control procedures by itself should be well defined and documented prior to the award of the contract.

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