Fixed Fee Structures: 4 Key Items to Negotiate for a Successful Transformation Program

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Negotiating with the likes of Accenture, Deloitte, and other major vendors for strategic transformation initiatives is a challenging task, and it can result in future headaches and unnecessary costs if not handled holistically from the start.  Ideally, companies can benefit significantly by securing a menu of financial structures such as fixed price, time and materials, time and materials not-to-exceed, etc.

By obtaining these structures, program teams can tap into and apply to the various phases of their project depending on what is most appropriate given the situation.  However, obtaining multiple best-in-class financial structures at the Master Services Agreement (MSA) level is easier said than done and requires a nuanced negotiation strategy to be successful.

A large number of companies choose to apply fixed fee structures to their transformation projects.  Under a fixed fee model, a price is determined during the negotiation, and the vendor completes the scope of work for this price regardless of how much effort ends up being necessary.

In this blog, we want to highlight the key negotiation points that should be leveraged to achieve more favorable terms and an overall more sustainable relationship.  Given the complexity and depth of discussion required for these key items, we recommend companies introduce and address these points as early as possible in the negotiation process with their consulting partner.

  1. Obtain Ongoing Transparency in the Vendor Estimating Model

Contract ambiguity is the worst enemy to a budding strategic partnership as it introduces an unnecessary level of risk to any deal.  Seek to acquire complete and ongoing visibility into the vendor estimating model used to develop the detailed estimate for each SOW.

You want to obtain insight into the estimating factors and the level of effort by role and responsible party with corresponding hourly rates for all resources according to each phase of the project.  Doing this will allow you to have a bottom-up view of the estimate.  Additionally, revised staffing models should be provided throughout the negotiation process and over the course of the project as the scope and key assumptions change.

Acquiring greater transparency into estimating models will allow you to hold your consulting partner accountable throughout the project.  Informal or verbal explanations of these estimating models are not enough to support true accountability.

The key is to obtain a contractual commitment from your partner that they will provide complete and ongoing transparency into the estimates over the course of the project and the relationship.

  1. Establish an Upfront Contingency Percentage

We recommend establishing the maximum allowable contingency percentage upfront and ensuring this percentage is contractually committed at the MSA/MSOW level for all in scope program-related spend.  It should then be flowed down to the plan and analyze phase of work, as well as to any subsequent phases.

The level of transparency and degree to which the scope and assumptions have been defined will dictate the stringency of the permitted contingency percentage in your fixed-fee structure.  Having a rock-solid understanding of the levers that swing the contingency either way will elevate your ability to negotiate a proper contingency.

Please note that your consulting partner will push for a higher contingency percentage allocation for the blueprint or design phase as there typically is a greater level of uncertainty at this early stage.

If you run into this kind of resistance, make sure that this higher contingency percentage is only applied to the design phase and that the lower contingency percentage be applied to the subsequent phases.  Your consulting partner should be more willing to accept the greater risk profile in the execution phase given the additional clarity and definition gained during the design phase.

  1. Schedule and Quality Adherence Based on Key Project Milestones

Your fixed-fee payment structure should align with key project milestones with clear identification and definition of the deliverables that constitute the milestones.  Approval of the deliverables and corresponding milestones must be subject to a clearly defined acceptance provision.

In addition, your agreement should include a warranty period after the delivery of each milestone where there are no charges for any rework or remediation that falls within the warranty window.  With this incorporated in the contract, your consulting partner will be more inclined to provide high-quality work that meets your specific needs the first time, in order to avoid project setbacks and costly rework at no charge.

Further, we recommend allocating the most meaningful payment percentage to the final milestone when allocating your milestone-based payments across the project.  Establishing appropriate milestone-based payments that align with the work schedule and product will drive early accountability which has proven to be instrumental in setting the foundation for success and keeping transformation programs on track.

  1. Establish a Clear Change Order Definition and Protection

Companies must obtain a clear definition of what constitutes a change order. This entails definition and clarity around those situations that will incur additional costs or time, as well as those situations where the scope is reduced and a corresponding reduction in fees or time is applicable.

Your ability to maintain this clear understanding is directly tied to how successful you were in obtaining transparency commitments from your consulting partner as outlined in the first term discussed above.

At a minimum, your consulting partner should commit to absorbing any costs associated with errors and omissions made relative to their initial estimate, so long as those errors and omissions are not attributable to any inaccurate information provided by your company.

The Bottom Line

Reaching conceptual agreement on all these items is not an easy task.  Unfortunately, companies finalizing transformation-related contracts with consulting firms must pay close attention during the contracting phase to ensure that all commitments appropriately and accurately get translated into the final contract.

Negotiating these four key items early on and securing firm commitments in your contract will result in greater program transparency, accountability, and quality.  This will ultimately allow you to maximize the value you receive from your key consulting partners.