Maximizing Profitability: Unveiling the Advantages of Fixed Price Projects in IT Services

There is sufficient news out there to suggest we are dealing with an uncertain economic outlook. For many companies in the market for IT related services, this uncertainty is enough to put a halt on any capital investments that are even slightly risky in order to prioritize the need to reduce operating expenses in anticipation of tighter economic markets or rising cost of capital.

This could have an impact on your business selling software or IT related projects, especially those that do not have a strong tie to cost reduction, revenue increase, or are deemed to be risky.

Many deals now include the CFO as decision maker. A CFO will make an unbiased unemotional decision as they aren’t necessarily the business owner of the project. They want to see risk free outcomes and projects that limit cash outlay. One of the ways to package up your services as risk mitigated is to offer your service projects under a fixed scope and fixed price arrangement.

Fixed Price Projects vs. Time-Based Billing: Debunking the Risk Myth

Despite what you might intuitively believe, for tech companies that deliver services to customers; fixed price projects are no riskier than projects on time-based billing. On almost every T&M based project, the leverage stays with the customer, not the IT vendor. They are the ones that control when invoices get paid. T&M projects are effectively ‘not to exceed’ structures with payment in arrears of work performed.

There are actually advantages of fixed price project structures for tech companies:

• Milestone payments can be structured in advance, not in arrears. This speeds up cash collection.
• Milestone payments are much easier to administer.
• Fixed Price projects guarantee a set amount of revenue even if you deliver in less time than you quoted.

We would also argue that fixed price projects are more profitable than T&M projects. If you align your consultants to the right behaviors of minimizing hours to complete tasks, versus maximizing billable hours.

How do you manage Fixed Price Projects?

Defining scope

The most important aspect of all projects is defining scope and managing tightly to the scope definition. This is especially true with fixed priced projects. The statement of work must include elements of scope, assumptions, customer responsibilities, and billing milestone information. It needs to handle scenarios where there are project delays. Ideally, your PMs would create a project structure and SOW directly from a project template. This ensures all Project Managers have the same standard for project structure and definition.

Tracking Hours, Progress, and Cost

A project should be structured based on project tasks. Those project tasks should set a duration (# of days), as well as budget (measured in hours). Each task should also associate a default role (i.e. Consultant vs. Developer). That role should have a standard cost (i.e. labor cost per hour). When multiplied by the budgeted effort, it gives you the cost of delivery for that project task.

Now, if you assign a resource that is much more senior than the one expected to delivery the project task, you should be able to track the impact of this on the project. Resources should be able to tell you how they are progressing on the project task. If a task is going to take more time than expected, they should be able to communicate this to you.  They should be able to complete the task at any point even if under budget.  You should be able to compare similar tasks across projects to see if your template is set accurately.

Releasing milestone payments

Smaller fixed priced projects could be invoiced entirely up front. For larger projects, you could establish billing milestones that are attached to project phases. Project managers should be able to ‘release’ a milestone for payment simply by closing a task as complete. Accounting should have visibility on upcoming billing milestones and be able to track a project’s progress. Billing milestones should always be ahead of delivery. You should never deliver more than you have invoiced. Ideally you can recognize services revenue at roughly the same rate that you are collecting invoice payments.

List of Projects that have upcoming Billing Milestones

Capturing RAID

RAID refers to a log that captures Risks, Action Items, Issues, Key Decisions. Typically, your PMs will manage these either in a spreadsheet or a project tool that captures To-dos. Ideally, the RAID log is easy to communicate to customers, and directly attaches to project tasks on the project. So if a project is delayed, it becomes easy to understand why that is so. Managing RAID is key to maintaining scope and timelines. Key aspects to all projects, especially fixed price projects.

TekStack provides the tools to manage Fixed Price Projects

TekStack provides a full Project Management tool incorporated right into the CRM. This project tool can manage Fixed Price projects, T&M projects, or projects that have a mix of both fixed price tasks and T&M tasks. Some of the features available to customers:

• Creating Projects from Templates so that all projects have a standardized work breakdown structure based on best practices
• Assigning resources to project tasks to build up a project team
• Capturing budgeted costs and comparing costs to expected and actual
• Allowing resources to view assigned tasks and enter time against those tasks.
• Capturing progress (% complete) including EAC, or estimate at completion and how that EAC compares to budget
• Tracking RAID logs
• Tracking change requests including generating change request work order documents for customer approval
• Allowing customers access to the project information through self-service web portals
• Supporting User Stories for hybrid or agile based projects
• Capturing and Releasing Project Billing Milestones. Project Managers can release the milestones as complete which will prompt accounting to review the milestone and generate an invoice automatically.
• Provide finance with a view of all upcoming billing milestones

Don’t shy away from Fixed Price Projects

Offering fixed price projects will benefit your organizations. It will speed up cash collection while removing sales friction. If managed correctly, there is no added risk to your organization because fixed price projects are really fixed scope, fixed timeframe projects. TekStack gives IT and Software companies all the tools to manage fixed price projects with confidence. Get in touch to find out how.