Points to Ponder: Fixed Bid Vs Cost Reimbursible contracts

In my experience, I have seen many Indian customers always prefer Fixed Price contracts against Cost Reimbursible contracts (e.g. Time & Material) for software projects. The reason may be because of the perceived risk of cost overrun in agreeing for a cost reimbursible contract.

Those who prefer Fixed Price contract should understand the following points:

1. Since the price is going to be fixed, the seller (software vendor) may become cautious and add more buffer in cost/effort estimation to take care of unforeseen risks. This will be actually much more than the effort required to develop the product.

2. Since the price is fixed, the seller will be under pressure for any delay during the execution of the project. If these delays are because of the buyer (delay in providing adeqaute information, support etc.), the seller will try to re-negotiate the timelines and cost. Such re-negotiations may include some more buffer due to the experience and it may cost the project much more than the actual cost of a Time & Material contract.

3. In a fixed bid contract, the buyer's project coordinators may act without diligence just because any delay due to non-cooperation, lack of clarity of requirements etc. are not going to cost them directly. But indirectly it will cost the buyer also in terms of poor product quality and extended timelines. In a schedule overrun project, not only the seller but buyer also spend more effort from his side.

4. In a fixed bid contract the buyer cannot expect 'sophistication' in the product since the seller may try to complete the product just to meet the requirements rather than to provide anything 'excellent'. Many sellers even try to smartly trim the requirements pointing to various reasons towards Technology, Best practices etc.

5. It is very difficult to hold the interest of the seller in a fixed price contract if the project extends beyond the planned timelines. This lack of interest will indirectly reflect in the product quality due to lower morale.

Generally the buyers should opt for Time & Material contratcs when their needs are not clear. Otherwise it may appear that the buyer saves money (mostly at the cost of sellers) but there are much more other ways as explained above, they too will loose.