Friday, September 21, 2007

Managing Risks of Fixed Costs

Last week 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:

1. 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.
2. 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.
3. 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.
4. Track time as carefully as costs: time often translates to money, and lost time can translate to unexpected costs.
5. 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.

That covers my list! As always, comments welcome in the post or to Thanks for stopping by!

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