The 5 Most Common Myths of Fixed Pricing
Jason Thomas has been helping launch and develop start ups for 10 years. Jason's passion is working with motivated entrepreneurs to validate and implement ideas that grow their business.
Jason is a husband, father, and homesteader in training. In his spare time he's generally outside working with his hands and getting dirty.
Believe it or not, Fixed Priced Proposals are the most common way to contract a freelancer, vendor, or agency. For both the vendor and the client, there are usually assumptions on what the benefits of the fixed price agreement actually are.
Some assumptions of fixed pricing are:
- It is safer than variable cost agreements.
- It locks the vendor on a certain price quote so you don't incur unexpected charges later.
- It locks your solution provider into a fixed scope therefore reducing risk.
Clients assume they are mitigating risk, getting the best quality for the best price. Assumptions are too often incorrect and important decisions shouldn't be made based on them.
In this article, we are going to expose the myths of fixed pricing projects and call them out for what they really are, but before we go into each one…
I just want to make this point: Think of a mechanic, doctor, or construction worker…would you really want anyone of these professionals to give you a fixed price on a job, then leave something important out that did not fit in the price scope?
Of course not! Why would a client expect any different from a marketing or design provider?
Myth 1: Fixed Pricing Makes the Project Safer
An Inbound Marketing project is safe or risky based upon how well your strategy solves for your objective. The record of accomplishment of your provider is in achieving such objectives.
How you pay them is almost a non-issue. If you work with a reputable vendor with a track record of success, you're safe either way.
As we mentioned before, you would want a mechanic to let you know if, in the process of one objective, he discovered a deeper issue. The same goes with hiring a marketing or user experience provider
By leaving those things untouched, and only staying within the fixed price of the project, chances are down the road your vehicle would have broken down and the mechanic would have to work on those issues eventually. In essence, it is just delaying the inevitable.
Myth 2: Fixed Pricing Locks the Vendor in on Price With No Additional Fees
Fixed pricing doesn't lock the vendor in on a certain price. Project scopes always have grey area. If something is not defined in the project scope, you'll receive a change order when you ask for it. This will increase the price.
Example: Your project scope is for a website with an approved sitemap. In the middle of that project, you decide you need an extra page for some reason, or you want to change the pages you've already put into the scope. Agencies will do a change order, charging an additional cost for the additional work you, as the client, are creating for them. This is only fair.
The fact that the original proposal's price was "fixed" doesn't protect you from increased pricing in the event something in the scope needs changed.
Myth 3: Fixed Pricing Comes With a Hard Deadline
In a perfect world, deadlines are always met. However, in reality, deadlines can be missed way too often. Just having a fixed price doesn't guarantee all deadlines will be met. Here are some questions you need to ask yourself regarding the deadlines you set:
- What if you are slow on approvals?
- Did the scope specify what the expectations are for communication mid-project?
- Have you evaluated the capabilities of your chosen vendor to deliver on time even if they face illness, accident, or emergency?
- If they get behind do they have extra capacity needed to recover once they are behind?
- And most importantly, what is their track record for delivering on time?
These are far better indicators than feeling a fixed price quote covers it.
Consider this: Whenever you go to the doctor or to the emergency room, have you ever heard a doctor (or nurse) say that you will be out at a given time? Of course not! They have to do test after test and have to wait themselves for the results of those tests to come in. Sometimes those results don’t come back for days, or even weeks.
Even though you may be frustrated with the waiting, deep down you know there is nothing that can be done about it. You know these doctors want to ensure you are healthy and have no other health issues that could cause concern down the road. You put your trust in them and pay whatever it takes to ensure they do the best job that they possibly can.
Myth 4: Locked-Down Project Scopes Are a Good Thing
This is the myth that fixed pricing sets project scopes it stone, which is a good thing for the client. But what if they come up with a better idea mid-project, adding work but multiplying benefit?
Their only choices are to:
- Present the idea with a change order and delay in project. (rarely)
- Provide the better implementation free of charge (unlikely)
- Keep their mouth shut and deliver what you asked for and “maybe” present the idea later (most likely)
Consider the profession of a construction worker: When you hire a construction worker to renovate your home, he'll do an assessment for anything that is hidden from the naked eye. He types up an overview price quote for the job to which you, as the client, agree. He goes to work, but in the midst of one room he finds that your foundation is settling, and will cause major damage in the future.
The construction worker could continue with the project as states in the original project scope and forget about the foundation issue. Doing so only delays the inevitable, and will ultimately cause more harm than good. Plus, this will hurt his own reputation and will go against his integrity as a service provider.
Would being locked into the original scope of the project be beneficial to you as the homeowner? Of course not! Why would your website or marketing be any different?
Myth 5: Rigid Specifications Mean Successful Projects
Every single fixed price project specification I've seen, regardless of whether created by client or vendor, is stuffed full of assumptions. If any of these assumptions turn out to be incorrect, the entire project is put at risk.
Making assumptions about what will or will not work, before you even start the project is the, most common way to set your project up for failure from the start. As I stated earlier, assuming is the very road to failure? I have lived by the mindset that assumptions are often incorrect and critical decisions should never be made based on them.
Getting Over the Fixed Price Blues
The biggest problem with fixed price projects is that most are sandwiched between 30% and 100% of unknowns. If you're asking the vendor to carry all the risk if something goes wrong, or is more challenging than expected, they'll price the project based on that risk. Are you comfortable paying such a premium to secure a "safe" project?
There's a better way to get the best work from your vendor, and we discuss it in our new eBook, Price Wars. If you're wrestling with the results and risks associated with fixed-price projects, you should give it a read