Fixed Price Contract Types

Currently in software industry there is too much demand to go-ahead with fixed price( FP) types of contract.Its always beneficial to the customers rather than service providers.

Following are three main types of FP contract I experienced in my software management experience and thought to share with you.

Types of Fixed Price Contracts:

There are three types of main  fixed price contracts and they are:

1.      Firm fixed price (FFP): This  type of contract is  the mostly used contract type and is acceptable by most of the organisations because the cost  is already committed and is not subject to change unless the scope of work changes. Any cost increases due to adverse performance would be the responsibility of the customer.

2.      Fixed price incentive fee (FPIF): This type of contract gives the customer and vendor some flexibility in that it allows for deviation from performance, with a financial incentive for achieving certain metrics. The incentives are related to cost, schedule, or the technical performance of the seller. A price ceiling is set and any costs above that ceiling are the responsibility of the vendor.

3.      Fixed price with economic price adjustment (FP-EPA): This type of contracts are used for long-term contracts and they allow for some pre-defined adjustments in the contract price due to changed market conditions.

The fixed price projects can be successful with small scale projects with clarity in requirements and scope of the feature is well defined. In today’s mercurial market situation companies are breaking the long duration and high cost project in to smaller and planning them to get executed with step by step. Companies are not ready to go with huge investment due to market situation, competition and unclear goals.

Overall it’s observed that, lack of product goal, unclear requirements and limited budget is forcing companies to execute the fixed price projects with agile methodology. Executing FP project with agile is suitable for customers (buyers) but risky and less beneficial to vendors (sellers). Customer are setting price for the project in advance and expecting the project to be delivered with accepting the change requests. This is the reality of the today’s market and no one go away from it. Here vendors need to come up with some approaches to deal with this situation and continue with business by gaining good profit and more projects.

Below section gives some typical approaches and tailoring of the agile values to make the fixed contracts suitable to customers and vendors.