The Fixed-Price Conundrum

When it comes to a major project that calls for a significant investment, we generally feel that it is
prudent to request a fixed-price – we prefer to know how much money will be involved, and more to
the point, what’s the most this project is going to cost me?

Conventional practice is to invite a number of contractors to quote the project so we can make an
informed buying decision. Seems like a sensible plan, but in fact, it is loaded with caveats. First of all,
we’re assuming any contractors we invite to determine the cost of the project are competent and
capable of arriving at an accurate estimate. If we use their quotes as the primary criteria to win our
business, we are inadvertently short-changing ourselves (a “value” subject of another blog).

The very nature of fixed-price work is that it is inherently a win-lose proposition, simply because a win-
win fixed-price simply doesn’t exist. Never has, never will. Think about it: where is the fine line in pricing
that produces an absolute win for both parties? Look hard. I’ve never seen it.

The problem is Murphy. There’s a ubiquitous law that states if anything can go wrong, it will. No one is
more familiar with that law than painting contractors; the prep takes longer than planned, the paint
won’t cover the way it should, the weather pulls a fast one and ruins a day’s work, etc. The only way to
offset the cost of Murphy’s law is to build a slight (10-15%+) hedge into your estimate to soften the
blow. In that case, the client pays (loses) if he accepts a quote and Murphy pulls a NO Show; a windfall
for the contractor.

When a quote isn’t sufficient to offset Murphy (surprise conditions that yield unexpected costs) the
labor or material expenses of a project significantly erode any hoped-for margin, and your project
depends upon an unhappy contractor who is losing money. Not good. Clients, in one way or another pay
for the happiness of their chosen contractor. Conversely, when the price of a project is, in fact, produces
a win by the contractor, the client owns the losing side of the transaction.
Nobody wants to lose.

Certainly, the client doesn’t want to lose by paying too much with hard-earned dollars that could be
allocated to more pleasurable purchases, and contractors naturally get alarmed when it becomes
apparent that they’ve priced the job too low and habitually default to cutting corners. The win- lose
aberration is actually a lose-lose proposition: the low-priced contractor is going to be in pain while he
tries to recoup some of his loses, and ultimately the “winning” client is going to have to pay the price of
compromised standards; the work will suffer. While there may be no such thing as a win-win fixed-price
proposition, the balance of win-lose deals creates an adversarial union where neither party wants to be
on the losing end.

So if a fixed-price quote isn’t the ideal model for conducting business, what is? If the painters are
experienced and productive, time and materials is often a favorable alternative to a fixed-price. But it is
not the best option. Watch for my next blog about a disruptor pricing method that will make incredible
sense and all other proposals obsolete.

Or, if you can’t wait – ask me about it now.