Fixed Price is a Lie
I’m going to reveal a truth to you that many in business would prefer you not know: Fixed price bids are a lie, especially in IT.
A few years ago I had the opportunity to explore the world of fixed price bids with an architect (a real architect, someone who designs buildings). I told him I was intrigued about “fixed bids” on construction projects as I am constantly challenged by people, particularly those critical of agile, that business requires fixed price bids for software projects. So I asked him, “How does fixed price work in construction?” What he described fascinated me, particularly for government projects.
He said the process is quite simple and straight-forward. An RFP is issued, sealed fixed bids are collected, the sealed bids are opened and the lowest price wins.
Puzzled, I said, “It couldn’t possibly work this way.” He said, “That’s exactly the way it works.”
Applying my engineering mindset, I said, “Then the specs in the RFP must be incredibly detailed.” He smiled and said, “No. In fact, the more ambiguous the spec, the lower the bid.”
I was incredulous, how could it possibly work this way? He went on to explain by simple example: “Let’s say the spec called for toilets on every floor. It didn’t say flush toilets. So we lower the price.” Thinking this through, I said, “That must mean lawyers get involved every step of the way.” He said, “Absolutely. We change order them to death.”
Thinking about this I realized why fixed bids do not work in the software industry. We don’t have the stomach for such conflict. If the spec called for toilets, we’d put in electronic toilets that give us health reports every time we use them.
Herein lies the power of agile: fixed budget projects that focus on scope management in order to achieve the highest possible business value within a budget and time frame. What does it take for this to work? A real and authentic relationship between the technical team and the business team. No longer do spec documents, stage gates, and committee meetings give both teams places to hide while projects spin out of control.
The lie of fixed price bids for software projects starts at the very beginning. A business sponsor approaches a technical team and begins to describe how simple the project is going to be. The technical team does just the opposite. Somewhere in the middle lies the truth, but the clever negotiator carries the day and believes they’ve gotten away with something. Once the negotiation is complete, the sponsor walks away believing they have successfully contained all of the risk of the project. Sadly we have watched this play out over and over again in our industry to the tune of billions and billions of dollars spent on failed software initiatives.
Most people want to believe that a firm and fixed price can be established for an innovative new software effort at the beginning of the project when we know the least. The advent of inexpensive off-shore labor made this problem worse rather than better. Business sponsors, armed with a new, inexpensive tool for software development, paid even less attention to the intermediate artifacts of a project. Let me describe an example.
Menlo was approached to respond to an RFP for the rebuild of an existing system. Our first response was to tell them that we do not respond to RFPs, which intrigued them. They knew enough about us to implore us to respond. Before we invested too much into a response, we provided them an estimate of effort for the project of between 8,000 and 20,000 hours, based on what they had described. (We were able to do this because we track all actuals on every project we work on. We have 8 years of data we can use to establish comparable projects.) They assured us they had done their own internal estimate and had a prominent offshore firm confirm their internal estimate of 4,000 hours for this project.
We declined to bid.
That project was supposed to complete in six months. I have spoken with them recently and it still isn’t finished four years later. They have invested thousands of hours of their own time doing just the quality assurance on the work performed offshore. In personal and painful discussions with their CEO, he has commented to me, “Rich, I will never choose the lowest bidder again.”
Our experience tells us that our best clients are ones who have experienced this pain somewhere in their careers, often at a former employer who is no longer in business. Designing and building software requires full spectrum engagement and relationship-building that typically does not exist in business. When properly applied, agile gives us that opportunity.
Project Management, Software Development
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bids, development, estimates, estimating, fixed price, off shore, pains, Project Management, QA, Quality Assurance, RFP, Software Development
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[...] second was a project we referred to in an earlier post when we talked about “Fixed price is a lie.” Our sizing for the project indicated it [...]