This is the second in a series of posts covering custom projects. See the list of links at the bottom of this post.
One of the biggest challenges is to fıgure out and apply the proper the Engagement model for Custom Projects. We make the assumptıon that the company intends to be paid for the "extra" work rather than giving it away (which may be the better approach!). "Engagement model" is just a fancy term describing the agreement between customer and provider about the manner in which products or services are to be delivered for a fee. The two traditional engagement models are Fixed-price (FPP) vs. Time & Materials (T&M). There are significant weaknesses with each of these models. We will briefly explore these models and review a hybrid alternative, the fixed-scope model (FSP), which begins to address some of these weaknesses.
FSP combines scope commitments by agreeing to deliverables, dates, and acceptance conditions. Payments are on a rate card basis (person count) with incremental acceptance crıteria tied to incremental revenue recognition. Detailed scope and project plan are agreed in the Statement of Work (SOW) to be part of the initial set of deliverables, after project start and subject to a Change Order process. This approach changes the dynamics of project initiation under the traditional models from the game of trying to get the most for the least or do the least for the most. This game usually takes place in the absence of any dependable informatıon about the detailed nature of the problem to be solved.
- Risk management: a T&M project puts all of the risk on the Customer. Typically there is little recourse for the Customer in failures to deliver. T&M has become much less popular in recent years due to this fact. On the other hand, FPP offers the opportunıty to shift most of the project risk to the Supplier, by tying payments to formal acceptance procedures for the deliverables. Of course, the ultimate business risk is borne by the Customer by not having what is needed by the expected timeframe. But most of the project risks for an FPP are on the Supplier side. FSP puts greater balance in the relationship with regard to project risk. Scope is committed to ensure the Customer gets the desired results by deliverable and date. The Supplier gets a recognition up front that the Customer is engaged financially from the start and that project scope can change as the Supplier learns more about the problem. Both parties are encouraged to put “skin in the game”.
- Cash and revenue: For T&M, cash and revenue recognition come continuously to the Supplier. But the customer cost to complete is borne entirely by the customer, even if you agree in the T&M SOW to set a maximum expenditure. If the functionality is not yet complete, there are unavoidable pressures for the Customer to keep paying until it is done. Typically, while there may be progress payments by Deliverable in FPP contracts, the strong card held by the Customer is that the Supplier company will typically not have the ability to formally recognize this revenue (or in some cases to get cash) until the project is complete. This is a very powerful stick. Combining acceptance-certified deliverables (the “scope” of FSP) with accommodations for incremental revenue and revenue recognition has the advantage of sharing financial rısk at the same time as getting the expected functionality in the hands of the customer at the agreed timeframes.
As you write an agreement with your customer to purchase custom work, consider carefully the alternatives for structuring the project. FSP projects offer advantages not found in FPP and T&M projects. What is most important for all non-T&M projects is making sure the SOW includes a deliverable to be completed that marks the definition of project scope. Built into the project. Typically, the scope is never clear until significant investment is made by both parties in understanding the solution to the problem. The Supplier wants to get paid for the analysis because this is real effort expended by the senior supplier team. This planning activity itself has value to the Customer. The Customer business owners (not necessarily the procurement department, who deals with projects as abstractions) have a strong incentive to get the scope right. It is also important to build-in a mechanism to allow project scope to be formally modified under mutual agreement - the Change Order process- so you can reset the project in an orderly way. Give yourselves a basis for keepıng expectations aligned throughout the project. This is the ultimate challenge for all projects of any size or shape.
- Part 1: How to run custom projects. Introduction.
- Part 3: Life-cycle issues.
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