Fixed Price and the Illusion of Control

When clients come to us, especially new clients, we often get asked to work with them on a fixed price basis. The reason for this usually boils down to a desire to contain the costs and limit the timeline. If you want a project to only take so long and cost so much, why not bake it into the contract itself? Or so the thinking goes.

Paradoxically, however, fixed price projects do nothing to contain the risks of an overpriced, extended-timeline outcome, and, if anything, make them more likely.

First of all, something everyone agrees upon: a startup is a risk. Uncertainty is the only certainty when building a new thing. Before product-market fit is achieved, your product will necessarily go through a multitude of changes, and it is nigh impossible to predict those changes from the outset.

Second, in a situation in which things can and must change frequently, the best way to hamstring yourself is to create a fixed, inflexible plan at the beginning. Imagine, for a moment, that you and your consultant agree to a fixed price contract with milestones, timelines associated with those milestones, and payments to be made on successful implementation of those milestones. After a few weeks and some user interviews, it becomes clear that drastic changes need to be made to the product if it is to ever be successful. Unfortunately, your consultants are contractually obligated to complete the project as specified in the contract. Worse, as the consultants deliver on those milestones towards a product that is now useless to you, you will be contractually obligated to pay them for it anyway!

Finally, fixed price projects, fundamentally, are attempts to shift the risk from the client to the consultant – meaning that the consultants will have a fiduciary obligation to give a quote that is far above what I think it will cost to do the project. In such a situation, the incentive changes from “how do I build the best product possible” to “how do I turn a profit even in a worst case scenario?” A consultant will then run through some scenarios and how much they would cost to fix – and then set the price to cover those worst case scenarios. This often:
– is the exact opposite of what the client is trying to achieve by asking for a fixed price (namely, contain the costs),
– sets up an adversarial client-consultant relationship, since now the consultant must say no to any changes proposed by the client,
– greatly restricts flexibility, resulting in an ineffective product, and
– results in a lower quality product overall by incentivizing an extremely conservative approach in the consultant.

Our goal is to provide clients with the best service resulting in the best product possible – and fixed prices prevent us from doing that. This also seems to be the consensus among the best developers we’ve worked with, and who are also reluctant to work under fixed price contracts.

Time and materials projects, on the other hand, give the client ultimate control over the cost and timeline of the project. Consultants work at the direction of the client, and the client determines what is worked on, when, and for how long. This allows them the flexibility to change course when required, to cut their losses on features that aren’t worthwhile, and respond quickly to user feedback. Paradoxically, by NOT agreeing on a scope, a price, and a timeline, clients are much more likely to achieve all three.

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