The Peace of Mind of Fixed Quote Projects

Drew CrawfordNews

There are two types of software contracting arrangements.  One is called “Time & Materials”, which means that you’re paying for the developer’s time.  The other type is called “Fixed Quote” or “Fixed Bid”, which means you’re paying for a project.

According to the Standish Report, 71% of software projects are challenged or fail completely, and the average budget overrun for those challenged or failed projects is 56% over the original budget.  Software development is a risky business by any measure.  Overruns in software far exceed every other industry, and for those not “in the industry” it is difficult to understand how a project “estimated” at $25k turns into $39k in the blink of an eye, but it is unfortunately a market reality.

The dirty secret about T&M terms is that there’s no guarantee that the final cost resemble the initial estimate.  It’s no wonder that many contractors favor Time & Materials contracts, where when (not if) the budget is overrun, the client eats the cost.

Even above and beyond the Standish Report’s numbers for generic software development, competition in the iOS contract development space is at an all-time high, and there’s increasing downward pressure on iOS contractors to get contracts.  Over the same period, the actual cost to develop iOS projects has remained relatively stable.  This creates an impossible situation.

Since there’s no requirement that a T&M estimate match up with reality–it doesn’t.  Contractors keep producing more and more unrealistic “estimates” in order to beat out the equally unrealistic estimates of competing firms.  The end result is a sham competition to produce the lowest number, instead of the correct one.  We monitor the market constantly, and we regularly see “estimates” going out for 10-20% of the final project cost.  Either scope is aggressively cut, or budget is aggressively raised (often both), and the final product is nothing like the negotiated functionality or cost.  Sometimes the project is simply abandoned.  Either way, the client is left holding the bag.

My grandfather used to say “If you pay a man by the hour, he’ll work a lot of hours; if you pay him by the brick, he’ll lay a lot of bricks.”  Fixed Bid projects mean that you pay by the project, so you’ll actually get that project without any bait-and-switch.  It also means that the estimate the developer produces will be a real one, not a sham number to get you to sign.

In an environment where budget overruns are incredible, the most valuable thing you can have is insurance.  When you sign a Fixed Bid contract, you’re not only getting a project delivered–you’re buying insurance against a bad estimate.  The contractor is legally required to produce the agreed-upon project at the agreed-upon price, regardless of the accuracy or realism of the original estimate.  The developer eats the cost of overruns.

Contractors are reluctant to offer Fixed Bid terms for three reasons.  Firstly, because it’s difficult to accurately estimate the final cost of a software project, and they don’t really have confidence in their estimates.  Secondly, because taking the appropriate steps to ensure good protection against risk can be expensive, and can significantly raise the price of the estimate.  Thirdly, because the estimate is often competing against other T&M (made up) numbers, and quoting the premium for Fixed Bid terms often means the contractor loses the bidding war before it starts.  As a result, lots of deals are signed on T&M terms, and the App Store is littered with the carcasses of T&M projects gone awry, not to mention the mile-high pile of projects that never even made it that far.

Unlike every other player in the market, the vast majority of our business is Fixed Bid, and we have very few T&M contracts only in unusual circumstances.  We have tremendous confidence in the accuracy of our estimates and we’re not afraid to stick to them.  At the same time, our quotes tend to be a lot higher than the wishful optimism of T&M “estimates”.  But that’s the premium you pay to know with certainty how much your project is going to cost instead of being surprised part way through development.

When you’re comparing quotes, make sure that you’re comparing them on equal footing.  T&M estimates aren’t worth the paper that they’re printed on.  Ask the developer what percentage of its projects were delivered within the original budget.  After dozens of Fixed Bid projects, our track record is still 100%.