Tuesday, October 5, 2010

Fixed-price Contracts for Website Development

You need a new website. You have a maximum budget for its development. Should you find a vendor that will build it for a fixed price? The short answer is no most of the time. This post will explain why.

Is a fixed-Price Contract Really Fixed?

Some people think that asking for a fixed-price contract is a sure way to control how much the website development will cost. Not true! A friend of mine learned that the hard way. She ended up paying more than twice the “fixed price” amount. Instead of having meetings to design her dream website, she spent months arguing with her vendor about what was in the contract and what was a change request. Then she had to turn around and fight with her boss to get additional funding.

The Point of View of the Vendor

When a vendor receives a request to develop a website for a fixed price, he will assume that:

  • He is not alone to receive such a request;
  • The customer does not want to pick and choose various options;
  • The price will be a major component in the vendor selection.

The vendor will then design a bare-bones website that will meet the letter of the requirements stated in the request for proposal (RFP) and that will cost as little as possible to build. Designing and costing a website for what the customer really wanted is useless because someone else will get the contract. The bare-bones website can even be offered with very little profit margins because the customer will surely want more. The change requests is where the profitability of the contract will come.

Can you blame this vendor? How could you when you probably rejected the proposals from those who did otherwise.

When can you ask for a Fixed-price Contract?

A website development project has three phases:

Web development methodology best practice

The strategy phase is normally done on a time and expense basis. This is because the time spent on this phase depends very much on the customer coaching required and on the speed of the decision process. These factors are outside the control of the consultant.

The design of solution phase only costs between 15 and 20% of the project cost and is where decisions have a high impact on the website profitability. It can be performed for a fixed-price but I prefer to work on a budget. This allows me to explore in greater details options that may be very profitable for my customer.

The last phase is where the bulk of the budget is spent (around 70%). Because of that and because the end result is relatively well known, the web development phase is a very good candidate for a fixed-price contract. Or it can be on a budget basis. The choice is yours.


With a fixed-price contract for the entire project, you either pay what was agreed upon but have a website not quite to your satisfaction or you bust your budget. The only time you should do this is when you are more penalized for going over budget than when ending up with a bad website.

On the other hand, it can be interesting to have a fixed-price contract limited to the last phase (web development). If you do so, make sure that your website specifications are well documented in the strategy and design of solution phases.

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