Beyond Repair: The Fixed-price Model

Don't get me wrong. I certainly don't think the majority of vendors who use a fixed-price model are trying to rip you off. In fact, when I started my business that's the way we worked-which is why we have such great insight into the flaws in the system. But there needs to be a transparency to the work. You need to know exactly what you're getting, how long it takes, and how much it costs. You need to know that you're only paying for time actually spent on your account. And you need to know that no risk will ever be taken with your system just to maintain your contractor's profitability. The inherent structure of fixed pricing makes this kind of transparency an impossibility. Here's why:

1. Fixed pricing is designed to function with the absolute minimum amount of human attention. The more the company does not work for the client, the higher the profit. This creates an adversarial system where the caretakers fight to do as little work as possible no matter how much they are being paid.

2. Fixed pricing encourages wastage. Since a fixed price contractor has an hourly rate in mind - say $120/hr - then when they quote $12,000 per month, that really means that they intend to spend no more than 100 hours per month on your account. But if near the end of the month they have only done 20 hours, for example, then what happens to the other 80 hours? Nothing. You would have received inferior services for an astronomical hourly rate and have no recourse to approach the contractor and ask that they put in a little TLC.

3. Fixed pricing encourages increased risk. This one has a little math behind it: If a problem can be corrected in 1 hour but has a 10% chance of reoccurring in 2 months, or can be corrected in 5 hours and will never happen again, the fixed price contractor will always pick the 1 hour solution. Why? Imagine that they have 10 different clients with the same problem. They can spend 50 hours fixing it the right way for everyone, or spend 10 hours fixing them all the wrong way knowing that only 1 in the 10 (10%) will have a problem in 2 months (incurring another 1 hour then). Therefore, the total time saved by doing it the wrong way is 39 hours. A huge savings to the contractor.

Now imagine if that problem has downtime or data loss associated to it. This will never factor into their profitability equation.

4. Fixed pricing can be deceptive as far as measure of quality. Take database administration, for example, since that's what I know best. The measure of the DBA job in a fixed price model is to ensure that the database is up. Performance improvement or dealing with performance decline is not even in the contract. Also missing is any diagnosis of complex performance or network issues which may involve more than one piece of the architecture puzzle.

As soon as the fixed price DBA determines that "it is not the DB", the client is on their own trying to correct an issue where a DBA could be invaluable in diagnosis and building a plan for corrective action.

5. Fixed pricing estimates are high. They are high on a per hour basis and on an hours spent basis. This is because fixed-price contractors have to back their estimate for a year. You are paying for the risk that they have estimated another account improperly and need to make it up on yours. You are also paying for the risk that you may develop chronic problems-and so they charge for that in advance whether it happens or not.

Once the year is out, the best case scenario is that you have managed to be a "problem account" for them and have actually received some bang for your buck. Now that they know what kind of hours it takes to manage your account, you will receive a new estimate that will be calculated as follows: (yearly hours)*(markup for risk)*(200/hr)/12=(monthly rate). You will most likely not be told this formula but I guarantee that it exists. You can never beat it. You will always pay premium rates, even if you make it through the first year fighting for attention.

6. Fixed pricing never goes down, and it usually goes substantially up after the first year. Whatever the price is, the fixed price contractor always has an hourly rate in mind, like $200/hour. Ask. If you have already hired a fixed rate contractor, ask for a monthly report of how many hours they spend on you. Ask. You will most likely be denied since the hourly rate can be astronomical if they have successfully avoided doing work, but definitely ask.

And what happens if your technical needs are much greater than anticipated? At the end of the year, your fixed rate will be increased based on your hourly usage in the previous year so that you are back at their target profitability level (which they will still not share with you). Since you can never know how many hours they are really spending, you will never know what you are buying.

No matter how good it might seem at the outset, fixed pricing never adds up. You can never truly get the best deal-and you may be putting valuable data at risk. Because with a fixed-price model, if it ain't broke, they won't fix it.

Steve Pickard
CEO, Founder

Working actively with Oracle since the early '90s, Steve has architected and developed everything from large data-warehouses and decision-support solutions to award-winning instant Web applications. Steve has degrees in Mathematics and in Management of Information Systems from Ottawa University. Before founding Pythian, Steve worked as a consultant for numerous companies as well as the Canadian government. He remains the key architect of Pythian's highly sophisticated internal applications and business process systems.