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Agile Project Management - Engaging Your Customer!
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Why Projects Succeed - Executive Sponsorship
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On Customer Participation in Agile Projects
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The Benefits of Virtual Project Management
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Lessons Learned and the Project Council
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Project Management Across the Knowledge Domain
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Managing Risks of Fixed Costs
October 11, 2007 | Author: PM Hut | Filed under: Project Management Best Practices, Risk Management, Risk Response & Control
Managing Risks of Fixed Costs
By Ray W. Frohnhoefer
Previously we looked at fixed schedule, so its only natural to want to look at fixed costs too. Or perhaps I should more precisely say “fixed price” since fixed costs have a connotation of overhead. And there’s a further clarification to make as well (finances are so much more complex than schedule and time) — we’re talking about risk to the seller. Many buyers like fixed prices since they know exactly what their budget will be, but its the seller who has to manage most, if not all, of the risk.
Now with the clarifications aside, here’s my top 5 list:
- Well defined scope and specifications: Having a well defined project scope and necessary specifications will make it easier to manage and estimate. Uncertainty leads to errors.
- Diligently completed estimates: if there was ever a time to be cautious in estimating, this is it. Obviously you’re not going to be able to “sandbag”, but a carefully thought out and documented estimate provides a solid basis for success. Be sure to have it carefully reviewed and drill down where ever there is uncertainty or poorly defined specifications. Here’s a great place to look at historical information on similar projects.
- Track all expenditures as they happen, not when the invoice arrives: problems like delayed mail or slow vendor billing cycles can allow problems to go unseen. Estimate every expenditure and then compare to actuals. Use earned value methods if possible. Any deviations or unresolved differences need an immediate review.
- Track time as carefully as costs: time often translates to money, and lost time can translate to unexpected costs.
- Don’t be afraid to negotiate: its called fixed price, but the unexpected still happens. Obviously things like “I forget to add it into the estimate” aren’t going to fly, but legitimate additional time, expenses or scope can be negotiated if the costs become excessive. My company was the buyer of a fixed price contract that went on for an additional year or so because the company had an internal change of plans and was unable to assist the seller with certain aspects of the project originally promised. The seller was patient for a long time, but finally came back and rightfully negotiated to have some of the additional costs covered.
Ray W. Frohnhoefer, MBA, PMP is the Director of the Project Support Office at EDmin as well as a consultant, speaker, writer, educator, and mentor on Project Management. Ray is also the Component Mentor for PMI Region 7 (Southwest North America), a Past President of PMI, San Diego Chapter, Inc., and an adjunct faculty member at three San Diego universities. You can find out more about his professional roles at http://www.edmin.com/company/index.cfm?function=showBioDetail&id=80 and through his blog, Tales from the Project Notebook, at http://projectnotebook.blogspot.com.
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1 person has left a comment
The points mentioned here are spot on - one of the biggest risk in fixed price projects is the scope. What that means is scope should be clearly defined and then controlled. Same applies to cost as you rightly say. Calculating costs at the tail end of the project leaves a little room for corrective measures.