In the world of professional services industry there are three type of contract management.
- fixed bid
- firm fixed price
- fixed price with incentive fee contract
- fixed price with economic price adjustment contract
- cost reimbursable
- cost plus fixed fee
- cost plus incentive fee
- cost plus award fee
The majority of contracts in the software development industry are based on either Firm Fixed Price (fix bid) or time and material. As with any comparison, there are pros and cons between the types, as well as varying risks between them.
Managing a project is all about the scope; and the way the project is managed actually begins at the contract creation process because that is where the scope begins to be defined. If the scope of work cannot be precisely defined at the start, or a lot of high risk is involved in the project, the contract is more likely to be cost reimbursement or time and material. Projects with a well-defined scope of work and minimal risk are more likely to be of the Fixed Bid variety and could offer incentives. An example of incentive based contract is being awarded a project that has a scheduled based bonus: getting the job done in 60 days versus 90 days.
When it comes to managing the contract, it is the scope of work that we are managing, and both types of contacts are based upon a scope of work. If the scope changes, whether the contract is of any type, then the change order management process should be implemented. By managing the scope, you are guaranteed to manage the budget.
An approach to help clients with managing their budgets when the scope of work cannot be precisely defined is to contract the “Discovery” phase as time and material. During the Discovery phase, the scope of work and risks can be identified, detailed and documented along with reducing risks along the way. By following this process, it allows the scope to be more detailed and in turn provide a more accurate cost. Therefore, allowing the actual “work” portion of the project to have a separate contract that could be Fixed Bid.
A good real life example is a project we recently worked on, in which I will codename: Wildcat. Project Wildcat had a grant from the state for a fixed dollar amount. We had a high level idea of what we wanted to achieve within that amount, but it was not precisely defined. We knew we had x amount of dollars to use, so we spent time and defined the project, and leveraged out of the box functionality wherever we could. We proceeded to prioritize functionality to help insure we completed the major components needed within that dollar amount. We then kept a “wish list” of sorts on the side, and as the functionality and scope became more clearly defined we were then able to estimate what we could do, and which wish list items we would be able to accomplish. We were very successful with project Wildcat; accomplished all key functionality items that were defined by the scope, as well as some added wish list items.
All in all, if you manage the scope, with Time and Material and Fixed Bid projects, you will succeed.