How to choose between a fixed price project and a project under management
When launching a web, software or mobile development project, the question always arises: What type of contract should you use with your IT service provider? A project managed on a fixed price basis and a project managed under contract are very different.
The first thing to keep in mind is that there is no inherently better choice. The selection will be made according to:
- your goals
- your project
- your budget
- your delivery times
- your various constraints, etc.
Before getting to the details, you can take a look at our previous articles, which can give you some valuable background on the topic:
- Package or management contract: differences and advantages? Read the article
- How to properly frame an IT project Read the article
What are your project’s characteristics?
Choosing between a fixed-price or contracted project will first involve an assessment of the degree of complexity of your project. Is your project complex from a technical point of view, or because of its required delivery time, budget, location, etc? Complexity can come from anywhere.
To meet the needs of your project, the IT service company, which are now popularly called a DSP (digital service provider), could even consider in some cases mixing the advantages of the two modes, for example to establish a contract for a single project or sub-project.
Knowing the use cases of your application inside out will help you make the right choice of contract.
In order for the DSP to offer you the best possible contractual option, you must be aware of the needs, limits and above all the risks of your project(s). Having a deep knowledge of the risks it will face in fulfilling its intended use cases will lead you to the ideal solution.
How does a package service work?
At first glance, the fixed rate package almost always seems to be the best choice. The package is very attractive with its many advantages for the client, among which are:
- A commitment to results carried by the project manager (the DSP in this case).
- A fixed and controlled budget.
- A firm and pre-determined final delivery date.
- A well-specified set of deliverables.
Indeed, the fixed price contract remains the most relevant option if the principal knows with certainty and precision all of their needs and if they have the ability to precisely imagine the final result they require. Without these two conditions, going with a software development project in package mode is a very bad idea.
In addition, from the experiences that we have had with more than 200 projects delivered in different sectors of activity, the companies that do best on a fixed-price project mode are those that already have a good degree of maturity with regard to the required involvement in a project, and also in their own professional area. This will make them much better equipped to explain what they want to the provider.
Finally, the fixed rate package will be perfectly suited, unsurprisingly, to companies that already have experience of a project carried out in this mode.
Package billing method
The amount invoiced to the customer is defined upstream. This amount is firm and will not budge until final delivery. In reality this tends to be wishful thinking, because in 90% of cases, there are obstacles and unforeseen events that arise during the project. These deviations are usually unforeseeable at the outset, and can give rise to additional quotes that will accumulate on the initial amount that’s been negotiated.
How can I ensure that my fixed-price project doesn’t get “out of hand”?
Some attention must be paid to this notion of “additional quotes”. Indeed, very often, the relationship between the customer and the service provider can become strained because of the additional quotes that accumulate on a project.
To minimize the appearance of additional budget allowances, the principal (client) should be fully aware of the risks and challenges of their project, in order to anticipate them as much as possible and avoid any surprises. And it is up to the DSP to fulfill their duty as a consultant and to communicate to the principal any gray areas or ambiguity that could give rise to additional costs during the project. Transparency and communication are essential! Right from the start!
How is a service performed?
A contract in managed cost mode is sometimes called “technical assistance”. This type of contract is carried out, within the framework of software engineering, by a resource who can be a developer, a project manager, a technical architect, a designer, a Product Owner… The resource will carry out the work that is requested on behalf of the client – the principal.
You may have already begun to grasp, that a managed cost mode contract is an excellent way to strengthen your pre-existing team. This form of contract makes it possible to complete or strengthen a technical team using the expertise of collaborators from outside the company.
With a managed service, the IT development company will need to meet an obligation of means (and not results, as with the package mode). That is to say that the DSP will need to use all human, technical and methodological means available to meet the client’s requirements and expectations.
A managed contract mode has the advantage of saving time for the principal. The project launch will be much faster because there is no need to provide exhaustive and complete specifications from the start. Managed contracts provide agility and flexibility for companies that have experience working with this mode, and they are increasingly using this billing method.
Billing method of managed contract mode
The client will be invoiced according to the time worked. In general, this will be billed monthly. If, for example, a developer worked 15 days during the month of July for the SAFARI client, then the DSP will invoice the SAFARI client for 15 days / hours. This will correspond exactly to the time spent by the developer (the resource) on the client’s project.
The customer therefore pays at the Average Daily Rate (ADR) spent by the team provided by the DSP to work on their project. The ADR billed varies according to several characteristics of the members of the team that have been provided:
- Geographic area: an excellent developer based in Vietnam will be much less expensive than an excellent developer based in France. Offshore IT is an option widely used by companies to better control their costs with new software and technologies.
And why not go on a mixed, hybrid contract?
It may also be interesting to take advantage of the best of the two modes with a hybrid contract, which can be called: global technical assistance or even fixed-rate management.
In general, this mixed mode is used when transitioning from a package to a managed contract or vice versa.
5 questions to ask when choosing between a package or managed contract
There are certain questions to ask that can quickly tell you whether you should opt for the managed or the package contract.
Study the points below to make sure you are settling on the correct billing method for your IT project.
- Are you expecting a concrete deliverable that is precisely described in a specification? In this case choose the fixed price package.
- Is your budget flexible? If your budget is rather flexible, go for the managed contract; you’ll only pay for the time actually spent by the DSP on your project.
- Do you want to fully outsource the project? Both billing methods are suitable in this case.
- Do you need your team to be strengthened? Do you need more manpower due to a peak in activity? Choose the managed contract.
- Do you prefer to pay the IT service provider on delivery of the project only? In this case, it will be necessary to establish a fixed price package contract.
We hope that’s helped and we wish you good luck in choosing your managed or fixed price contract. Call us if you need expert advice!