Katherine Paine
Introduction
Offering your products or services on a fixed-price basis may give your clients greater predictability, potentially making your offering more attractive. However, such agreements carry inherent risks if not managed properly. What are these pitfalls, and how can they be avoided?
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Scope creep
Possibly the most significant risk in a fixed-price offering is scope creep — when you are asked, or pressured, to deliver more than you were expecting to without any adjustment of the price. Without documented, well defined boundaries, you might find yourself delivering more than you bargained for without additional compensation, adversely impacting your margins. Protect against it by:
- – Clearly specifying in the scope of work what is included, and what is not
- – Including a ‘management of change’ process and use it for any adjustments to scope, timelines, or both, facilitating conversations about corresponding price adjustments
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Underestimating costs
Fixing your price can leave you exposed if you underestimate what you will need to deliver, or if the cost of key inputs unexpectedly rises. Protect against this by:
- – Identifying key variables before pricing the project
- – Expressly allowing price adjustments if specific input costs rise beyond a given threshold
- – For longer projects, introduce milestone payments to aid cash flow and provide for indexation to mitigate inflation risk
- – Being clear about the key assumptions you made in pricing the project, that way if something changes, you can refer to these to support pricing discussions
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Delays
Delays you don’t control shouldn’t cause you financial loss. Protect yourself against clients not doing what they are supposed to, when they are supposed to do it by:
- – Specifying what you expect the client to do, and the timeline
- – Being clear that things will take longer and cost more if your client fails (or its other contractors fail) to do these things and this delays your work
- – And to reduce the impact of a delay that perhaps is your fault, it helps if your contract says that time is not of the essence – otherwise a delay could allow your client to terminate and seek damages
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Undefined deliverables
Vague deliverables often lead to disagreements over whether or not work has been done to the standard required. Such disagreements makes for unhappy clients, loss of future business, and sometimes even litigation. Avoid this by:
- – Being clear in your contract about exactly what you will deliver. Include technical details and objective acceptance criteria
- – Having a clear process for determining if work has been done to the contractual standard
- – Avoiding agreeing to do things to your client’s “satisfaction” as that is highly subjective
- – Being wary about promising specific outcomes; focus on what you can deliver rather than what your client expects those deliverables to achieve
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Cancellation or early termination
If your client cancels, or terminates early, you will lose out on expected revenue and be unable to recover costs already incurred. Protect your business by:
- – Including early termination protection in your contract that says what happens if the contract is cancelled before you start, or is terminated before you finish
- – Asking to be compensated in both cases. Even if you haven’t started work you will likely have incurred costs and if the contract is terminated early you want to ensure you are paid for work completed up to the termination date, and ideally a fee to cover the costs of redeploying the resources allocated to the terminated project
Jeff Bezos
Conclusion
Fixed price offerings give a competitive edge but, if not handled carefully, can expose your business to considerable risk. By defining scope clearly, setting client responsibilities, and planning for unforeseen changes, you can manage these risks and safeguard your profitability. A well-drafted contract with clear terms for scope, payment, and liabilities is your best defence against common pitfalls.
If you’d like to find out more, please get in touch
Written Fred Muchardt
Principal at My Inhouse Lawyer
One of our values (Growth) is, in many ways, all about cultivating a growth mindset. We are passionate about learning, improving and evolving. We learn from each other, use the best know-how tools in the market and constantly look for ways to simplify. Lawskool is our way of sharing with you. It isn’t intended to be legal advice, rather to enlighten you to make smart business decisions day to day with the benefit of some of our insight. We hope you enjoy the experience. There are some really good ideas and tips coming from some of the best inhouse lawyers. Easy to read and practical. If there’s something you’d like us to write about or some feedback you wish to share, feel free to drop us a note. Equally, if it’s legal advice you’re after, then just give us a call on 0207 939 3959.
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