The special challenges of project

management under fixed-price contracts

George Lowden, PMP, PgMP

John Thornton, PMP
Abstract

Performing a project under a fixed-price contract is more risky than other projects. For example,
the cost of such a project, agreed to with the buyer, typically is not subject to any adjustments
based on the seller's subsequent costs incurred in performing the work. Fortunately, many of the
risks inherent in managing a fixed-price project can be mitigated—during development of your
proposal, contracting, and executing the project.

This introductory-level paper first explains what a fixed-price project is and how it differs from
other projects. Then, practical and straightforward advice is offered for how to effectively
manage fixed-price projects, with a focus on addressing the special challenges, additional risks,
and other pitfalls that often accompany such projects.

Managing a fixed-price project is three parts knowledge, two parts experience, and one part art.
Fixed-price projects have a higher risk/reward profile. They pose greater risks in exchange for
more reward—if the proposal is bid properly, the work is well managed, and changes are
processed as contract modifications. You may need a little finesse to remind your client (the
buyer or customer) that a change you are being asked to perform is out of scope and requires a
contract modification. You also need a project team that understands the nature of fixed-price
work. This section provides an overview of the fixed-price environment and how these projects
differ from other projects.

Importantly, in a project being performed under a fixed-price contract, your client is buying a
defined set of services for a set price. If completing the scope of work and producing the
deliverables takes more effort or otherwise costs more than you, as supplier (the seller or services
provider) budgeted, the client will not pay any more. The risk of incurring additional costs to
complete performance of the project falls entirely on the supplier. You must continue working
until the project scope and deliverables are accomplished and accepted; otherwise, you may be in
breach of the contract.

In general, only when the client changes the defined scope of work can the supplier expect to
receive additional funding under a fixed-price contract. Performing any out of scope work that
has not been agreed to, such as through a change order process, adds costs to your project.
Accordingly, managers of fixed-price projects refer to their contract as often as needed to help
stay in scope with all work.
There are a number of different types of fixed-price contracts, including those that may provide
for an incentive/award fee based on achieving defined performance criteria or an economic price
adjustment based on changed conditions, such as inflation (PMI, 2013, p. 541). For purposes of
this paper, we will refer to the most common type: a firm-fixed-price contract, sometimes
referred to as an “FFP” contract. A firm-fixed-price contract is defined as: “A type of fixed price
contract where the buyer pays the seller a set amount (as defined by the contract), regardless of
the seller's costs” (PMI, 2013, p. 540). Under this type of fixed-price contract, there are no
adjustments to the price paid based on the supplier's cost experience in performing the project.

Projects also may be performed for clients under two other general types of contracts:

• Time-and-material (T&M) contracts—These provide the client with the ability to acquire
services or products on the basis of hourly rates listed in the contract and materials, as
applicable, sometimes with a materials handling charge. If the project takes more time, effort,
or cost to complete than originally assumed in the contract, the supplier performing the project
is not obligated to continue working once it has expended the budget or ceiling. The risk of
additional time and costs generally falls on the client. This type of contract is appropriate when
the scope is less well-defined or could change during the course of the project.
• Cost-based contracts—Also referred to as cost-reimbursement contracts, these provide
payment of allowable incurred (actual) costs to the extent prescribed in the contract. These
contracts establish a total cost estimate for the purpose of obligating funds and establishing a
ceiling. In cost-based contracts, the client carries more of the risk, as the supplier delivers “best
efforts” to meet the contract requirements. Cost-based contracts often are used where the
precise specifications cannot be articulated.

As shown in Exhibit 1, fixed-price contracts are the highest risk to the supplier and the lowest
risk to the client (Gray and Larson, 2014, p. 453). Cost-based contracts, on the other hand, are
the highest risk to the client and lowest risk to the supplier. Hence, project management
discipline is particularly important for fixed-price contracts.

Exhibit 1: Contract risk.

How Should I Manage a Fixed-Price Project?

To be successful at fixed-price work, it is incumbent on project managers to employ as much

project management rigor and discipline as possible, more than on T&M or cost-based work. The
kind of discipline that you need to follow on fixed-price contracts includes:

• Define your scope—Work jointly with your client to develop the project scope, objectives, and
deliverables. Ensure that your scope of work, basis of estimate, or equivalent contract
document defines clearly (preferably with specific, objective, and attainable criteria, as well as
any assumptions) what constitutes the completed and accepted deliverables. You may have
heard of such completion criteria often referred to as the “Definition of Done” in software
development. Endeavor not to leave any of the scope of work vague, open ended, or subject to
interpretation.
• Develop a work breakdown structure (WBS)—As you know, a WBS is a hierarchical
decomposition of the work, helping you to see both the individual components and the totality
of the work. The WBS subdivides the project into its various deliverables, then into smaller,
more manageable, and discrete pieces of work within each descending level of the WBS,
representing an increasingly detailed definition of the project work. You want to ensure that
your team's efforts are properly focused on the work required to complete the deliverables
specified or otherwise needed to perform the project's scope, not on other activities.
• Use a project schedule—This step involves determining the durations for each of the activities
identified in the WBS and sequencing the activities in a logical order. Some activities likely will
be performed sequentially and some performed in parallel. Project managers may be uncertain
about how much detail should be included in the schedule for a fixed-price project. The level of
detail is driven by the size, complexity, and risk of the project. The level of detail should be
balanced so that it provides sufficient information to allow management control, but not so
much detail that it becomes too cumbersome to use, review, and update.
• Manage to scope—Carefully and tightly manage your fixed-price project to ensure that you do
not incur unnecessary costs (no “gold plating”) and that the work performed either is within the
scope of work per the contract requirements and, in turn, your scope baseline and WBS, or
covered by a change order approved by the client in a contract modification (no scope creep).
• Educate your project team and client—Education is needed, not just for your project team, but
often for clients too. In particular, clients need to know both your and their roles and obligations
(e.g., how long they have to review/approve deliverables) under the contract.
• Hold regular internal project reviews—A good method to measure progress toward
completing—and controlling—the project scope is regular reviews. Reviews can facilitate your
ongoing assessment that the products or services under development conform to the contract
requirements and will meet the contract's acceptance criteria.
• Obtain acceptance—Keep in mind the important need to obtain client acceptance of your
deliverables, pursuant to the terms of your contract, both in writing and, ideally, on an ongoing
basis throughout performance of the project. You should clearly define the criteria if the client
has not, otherwise the possibility of an ambiguity exists. When you agree to perform a project
on a fixed-price basis, it is not unreasonable for you to want to know exactly what you are
expected to deliver. If you don't know, you may find yourself working toward an arbitrary goal
at a cost that may not have been reflected in your pricing assumptions.
How Important is Knowing the Scope of Work?

As project manager, you must understand the requirements of the contract's scope of work as
well as your associated cost assumptions. In a fixed-price contract, you are only contractually
obligated to carry out the specified tasks and activities for a fixed price. You are not required to
do more or do it better, faster, or differently, nor should the client be expecting you to do more or
do it better, faster, or differently for the set price.

For example, a task in a fixed-price contract might be completing a detailed review of 100 field
evaluations of a particular type and a checklist of the status of each of the evaluations by a given
date. All of these elements are part of the scope baseline. (The scope baseline is the agreed-upon
project scope statement, WBS, and the WBS dictionary, if used.) Change the number, type, or
contents of the field evaluations or checklists, or the timing of the task, and then the scope has
changed.

The scope is not a cost or price in this definition. It is a description of a task, subtask, activity,
and/or deliverable; and reflects corresponding pricing assumptions proposed and accepted by the
client. Always have a copy of the contract, price assumptions, budgets, scope baseline, and other
related documents nearby. Refer often to these materials to remind yourself and your team what
is in the agreed-upon baseline for your task or deliverable.

The main reasons that fixed-price projects fail are that they did not have a sufficiently clear and
agreed-upon definition of the project's work scope, or subsequent changes to work scope were
not appropriately managed. You, as project manager, have a responsibility to clearly define and
then manage the project work scope as well as the expectations of your client. Much of the
responsibility to define the scope is in the proposal process. If it is not clear from the client's
solicitation, ask many probing questions, such as “why are we doing this project?” Keep asking
the “why” questions to propel your search for the scope until you and the client agree to it.

As management expert Peter Drucker has noted: “Doing the right thing is more important than
doing the thing right.” The right thing is performing the agreed-upon work scope. Be proactive in
getting agreement with your client on your project's scope and try to minimize any ambiguities.
The time spent up front at project initiation will pay dividends as the project is executed. While
this may seem like extra work to accomplish up front when you and your team typically just
want to get started and make tangible progress on deliverables, it will pay off later by reducing
the likelihood of rework.

What Type of Working Relationship Should Exist with the Client?

As always, you want your client to feel that your organization can be counted on to perform
high-quality work, to be responsive to their needs, and to be easy to work with. One way to do it
is to communicate often and practice active listening. Communication is critical in project
management, and in the fixed-price environment, it is of utmost importance.

On fixed-price work, keep clients well informed of what you are doing to minimize the chances
that you may waste effort on something they believe to be wrong or otherwise do not value.
Therefore, a fixed-price contract may require more client meetings, outlines, interim drafts, and
the like than other types of contracts. Use these progress meetings and working documents not
only to review the status of each task and subtask, but also to obtain timely feedback, set and
adjust expectations, and flesh out potential problems (before they become actual problems).

These meetings can help surface inconsistencies that sometimes develop between the project's
scope baseline and the client's expectations, which may evolve and change as the project is
underway and your client becomes aware of new information. If any of your project results may
differ from expectations or may be controversial, you can also use these meetings to alert your
client as soon as possible. You can go a long way in preventing your client from disagreeing or
being unsatisfied or defensive if you have previewed results with him or her and answered
questions in advance.

What Should I do if the Client Seems to be Asking for a Change?

Each manager of a fixed-price contract will receive input concerning what the client is requesting
and expecting from a number of sources in addition to progress meetings and comments on
deliverables. These sources include the client and its staff, other project staff who have contact
with the client, subcontractors, and consultants that may have contact with the client, client
publications, websites, and maybe even the media. To the extent that the client seems to be
asking for something more or different than is in the baseline—in volume, quality, type, or
schedule—the client may be asking for a change. Should the client approach one of your project
team members about making a change, make sure they direct the client to you, as project
manager, to follow up accordingly.

In this regard, be aware that striving to improve a deliverable often is second nature for team
members. However, on a fixed-price contract, improvements often can inadvertently increase the
work scope and result in unfavorable cost and/or schedule variances. You should caution the
members of your project team to recognize that they all play a role in scope management and
cannot agree to changes in scope without the project manager. Their good ideas for revising or
changing the earlier, agreed-upon scope of a deliverable should not be implemented without the
client contractually agreeing to the change.

You likely will need to set some ground rules for change management at the beginning of the
project, and to resist the temptation to immediately agree with client requests for changes of
scope. Keep in mind, the first response on the project may set expectations for subsequent
requests. When a suggestion of change is made by the client, begin the process of informing your
client of the cost, technical, and schedule impact.

Confirm that the client is requesting what you think you heard or read, preferably in writing.
Then, before acting on the change, or even promising to do it, tactfully inform the client that the
change must be processed, priced, and agreed to by both parties (preferably pursuant to a change
control process). Believing that the task probably “has room” for the additional costs almost
certainly is unacceptable. The same holds true for thinking that sufficient profits are going to be
made anyway, that a management reserve can be tapped, or that you and your organization will
make it up later or on the next job. On a fixed-price project, former baseball star Yogi Berra's
saying “it ain't over ‘til it's over” is particularly apt in terms of the profit that will be realized.

To be sure, in new programs, not surprisingly, the direction of the project evolves based on what
has been learned to date. Changes can be used to improve what is being developed and
implemented. Or the original scope may have been written much earlier and could be out of date.
A change order can help deliver more value and benefit to the project. It's just a matter of
handling it correctly.

Each change must be in writing, priced, and signed by both parties before performance is begun.
Managers from a predominantly T&M or cost-based contract background may be accustomed to
accommodating changes straightaway. Certainly, your client needs to be satisfied on fixed-price
work too. You should strive for long-term working relationships and not being perceived as
“nickel and diming” or difficult to work with. But also keep in mind that your client did contract
for a fixed-price job and should understand what he or she signed up to with such a contract.

Informing the client that what he or she has requested constitutes a change and likely will require
additional funding is not punishing him or her. A key part of your job may be to educate the
client about what both sides signed up for in the fixed-price contract. If even a few of your task
managers start working “over” the scope baseline on some tasks or subtasks, they may not only
risk overrunning the project and impacting the bottom line, but likely creating difficulty for
others at your organization to deal with those clients on any fixed-price work in the future.

What is the Process for Making a Change to the Scope of Work?

The three most common reasons for a change to a fixed-price contract are:

• The initial requirements did not contain sufficient detail or clarity

• Requirements change due to new information about the needs of the project (better ideas occur
as work progresses)
• Functionality for a product may not have been sufficiently identified and subsequently not built
into the specifications for a system, particularly in IT projects

Once the need for change is identified, the change order process can differ substantially from
contract to contract. Larger contracts may use a project management office and a formal change
control process to review proposed changes and recommend whether a contract change is
warranted. Smaller contracts may not have this infrastructure and instead will require
coordination between the project manager and your organization's contracts department. After
defining the needs with the client, the manager must work together with the department to
develop a change order and a new basis of estimate (or equivalent document for the additional
scope) consistent with the client's process.

The change order, inclusive of price adjustments is delivered to the client for review and
approval. The process is designed to ensure that both the client and you, as supplier, understand
and agree in advance on changes and that the contract is amended accordingly. In requesting the
change, be sure to describe it as unambiguously as possible to avoid later confusion.
The proposed pricing for the change order generally will be based on the earlier price built into
the contract. For example, suppose an original scope called for review of 100 field evaluations at
a specified price of US$100 per review. The scope increased to include 200 reviews of field
evaluations. You would submit a change order indicating the request for an additional 100
reviews at US$100 per review, unless something else changes (such as the time allowed to
complete the reviews, the scope of the reviews, or the contents of the evaluations). Neither actual
costs incurred, nor where you are with respect to budget normally enter into the calculation. The
contract is not cost-based; there is not an opportunity to “true up” or adjust your overall
budget/price on the basis of costs incurred to date in performing the contract.

If the client wants a change to the original or modified scope, you must scope the changes with
as much detail as appropriate and price those changes accordingly. If, however, you do not
believe that a requested change can be performed profitably or at the profit rate originally
budgeted for the project, you should discuss the requested change with your supervisor. You
want to maintain good relations with your customer, but you must balance this with potentially
performing additional work unprofitably.

What are Some Ways to Manage and Mitigate Risks?

Risk management is important on all projects, but especially so on fixed-price projects. As you
know, project risk management includes processes for conducting risk management planning,
identifying risks, analyzing risks, planning risk responses, and monitoring and controlling risks
(PMI, 2009, p. 4). Risks can be related to technology, scope/requirements,
approach/methodology, quality, schedule, estimating/budget, staffing/resources, and other
factors. Risks also can be internal, within the control of the project manager, and external,
outside the control of the project manager. This well-established field in project management
includes many different processes, tools, and techniques to help managers address risk.

With our focus on fixed-price projects, you should be aware that there may be a number of ways
for you to transfer or reduce some of the risks that are inherent in such projects, as follows:

• Contract Type—T&M contracts and cost-based contracts almost certainly involve less risk to the
supplier than fixed-price contracts, as a potential alternative to consider with your client.
• Discovery Task—An initial discovery or scoping task/phase may help clarify the project's
requirements, documentation available, approach, deliverables, schedule, or other
considerations to effectively reduce the uncertainties and assumptions for the future tasks and
phases of the project. The results of this initial phase can help establish a common
understanding for the scope of the project and be used to progressively develop the fixed-price
buildup for the remaining phases of the project, presumably with less uncertainty.
• Hybrid Contract—Under this approach, a fixed-price contract is executed to perform specific
tasks or phases with clear requirements and less uncertainty, and a T&M contract is used for
those tasks or phases with more uncertainty. Related, there may be an option to establish a
fixed price for a particular resource, such as a block of time for the support of certain project
staff, perhaps on-site at the client's offices.
• Scope—With more specificity in the contract's scope/requirements, generally there would be
less risk. To the extent that your scope baseline, scope management plan, WBS, and project plan
are viewed by you and your team as reasonable and realistic, as opposed to the other extreme
 of only theoretically possible to achieve, there would be less risk. It is particularly important in
fixed-price projects that you focus on what is practical and that you can live with the approach,
not what is possible in theory. Related, you do not want to be on the “bleeding edge” of
technology; stick to “bread-and-butter” methods to produce your deliverables.
• Terms & Conditions—Working with the provisions of the contract, there may be effective ways
to bound certain risks through legal or other terms. For example, you could attempt to address
cash flow risks by having payment based on delivery versus acceptance, or based on a milestone
schedule with the definition of what constitutes acceptance clearly defined, or to front load the
payment schedule, if possible.
• Assumptions—With more assumptions in your technical approach or basis of estimate that
bound and set parameters around your carrying out the work, there would tend to be less risk.
A trade off to keep in mind is that your client may not appreciate the project being subject to
what may be perceived as an extensive list of constraints and, in turn, the risk of being “nickel
and dimed” through subsequent change orders.
• Experience—The more experience that you and your project team have with the client and/or
work involved, theless likely the risk.
• Schedule—Increases in schedule ordinarily would lead to a decrease in project risk; on the other
hand, beware that a longer schedule may lead to higher costs. Also consider building in
performance milestones when developing your schedule (and WBS), so that you can get more
opportunities for your client to weigh in and confirm that your deliverables are on point. You
may be able to incrementally build consensus with your client, facilitating ongoing or
subsequent acceptance of your deliverables (as well as potentially providing a basis for more
frequent deliverable/milestone based payments from your client).

How are Contingency Reserves Utilized to Address Risks?

One of the important tools to address risks on fixed-price projects is through establishing
reserves. A contingency reserve can be thought of as potential costs, not profit or fee, that are
incorporated into your project budget, as part of the cost baseline, allocated for addressing and
mitigating the specific risks that you may anticipate on the project. A contingency reserve often
is referred to as addressing the known unknowns on a project (the foreseeable uncertainty or the
identifiable risks). More broadly, contingency reserve is defined as: “Budget within the cost
baseline or performance measurement baseline that is allocated for identified risks that are
accepted and for which contingent or mitigating responses are developed” (PMI, 2013, p. 533).

Exhibit 2 depicts a typical buildup of the price for a fixed-price project, from the client's and
supplier's standpoint. As shown, there is your expected cost of undertaking the project, which is
comprised of two parts: (1) the base cost estimate; and (2) the cost associated with a contingency
reserve, providing the allowance for additional activities that may be needed beyond what was
assumed and planned in your base cost estimate. Fee, likewise, is comprised of two parts: (1) a
management reserve, if used, to be tapped in an emergency if any unforeseen risks may occur
(discussed in the next section); and (2) the fee that is appropriate for the type of project, market
conditions, level of competition, strategic considerations, and other factors.
Exhibit 2: Buildup of fixed price.

In basic terms, managers set up contingency reserves—certain mitigating activities and, in turn,
priced and budgeted costs—to help be prepared if (or when) specific, identified risks may occur.
Including contingency reserves in your budget does not necessarily mean that the risk-related
activities will be performed and the associated budget will be expended (either in part or in full),
as the risk may not materialize. Instead, it means that your project (including scope, budget, and
schedule) is in a state of readiness for uncertain situations that may occur. Essentially, it means
that you have recognized particular risks and, in the parlance of project management,
appropriately mitigated them through your advance planning.

Through the contingency reserve that you have inserted into your planning, the risk-related
activities and related budget are then at your disposal if any of the uncertainties occur. The
contingency reserve is there if you need it. If you are fortunate, you may not need to expend the
reserve. In fact, your goal as project manager is not to use the reserve amount, if possible.

A key advantage to an organization performing fixed-price contracts for clients is that you may
not need to spend your reserve. If you can successfully complete your project for less than
budgeted, including not tapping reserves, then you can earn a higher profit (the untapped reserve
is converted to additional profit). A client is willing to trade off this potential for your earning a
higher profit on the project in return for the security of paying a predetermined, set amount to get
the product or service. Fixed-price contracts also may represent less of an administrative burden
to clients.

Put another way, fixed-price contracts involve greater financial risk to the supplier, as you bear
the full impact of any costs that may exceed your budget estimates and price. In return for
assuming this higher risk, you can realize the full benefit of any cost savings vis-à-vis your
project budget and, as a result, earn a higher profit. Keep in mind, though, to earn such a profit
you need to be prepared to exert a high level of project management discipline from the outset.
You do not want to unnecessarily expend reserves on activities other than the identified risks that
were the basis for the reserves. Another benefit of incorporating contingency reserves into your
budget is that there likely will be less frequent changes needed in the budget, as you would have
attempted to already include all foreseeable elements of cost.

To determine what level of contingency reserves to incorporate into a fixed-price bid, start by
asking how comfortable are you in the base cost estimate being sufficient to perform the
contract's scope. If you already are knowledgeable about the type of work (both in general and as
it applies to the particular project), are familiar with and have mastered any technologies or tools
involved, and have favorable experience with the client and any subcontractors, then there may
be less risk. In this case, you may have relatively high confidence in your base cost estimate and
feel there are less risks to mitigate by separately budgeting reserves as part of your price build
up.

On the other hand, and perhaps more likely, you may feel that there are some specific risks
remaining that could affect your work, such as:

• Approach—There may be a risk that you have misinterpreted the contract's statement of work
or scope in some way in developing your technical approach and, thus, a possibility that your
approach may have to be modified.
• Deliverables—Given the nature of a project, such as for a new client or a new and evolving
program with many stakeholders, you may anticipate the risk of more rework of deliverables,
above and beyond what is assumed in your base cost estimate.
• Staffing—There may be uncertainty over your project staff, such that there is a possibility that
you may need different or additional resources to complete the work than you have assumed.
• Schedule—There may be a possibility that you will need more time to perform the work than
you assumed in your base cost estimate, which typically leads to more staff being needed.
• Client—You may wonder if your client will be able to hold up its obligations, potentially
introducing delays or other problems that may impact your project and may not have been
accounted for in your base cost estimate.

Your contingency reserve is the amount set aside for risks such as these that may occur and, if
so, some additional activities would need to be undertaken beyond what was included in your
base cost estimate. Keep in mind that a contingency reserve is for addressing risks. It is
understood that risks may or may not occur. In fact, in the building up of your fixed price, there
has to be a real possibility that you may not actually need to expend the contingency reserve. If
you are aware in advance that you will need to expend it, then—by definition—the amount being
reserved is not associated with responding to a risk that may or may not happen. That
contingency reserve amount instead belongs in your base cost estimate, not as a contingency
reserve intended to mitigate a potential risk.
How are Management Reserves Utilized to Address Risks?

A management reserve serves the same general purpose as a contingency reserve—mitigating the
effect of risks that may occur—but with a focus on addressing a different kind of risk: the
unknown unknowns (the unforeseeable uncertainty or the unidentifiable risks). A management
reserve can be thought of as an incremental amount to the planned fee on a project that may be
incorporated into a project's overall fixed price (as potential profit or fee, not costs). Given the
inherent uncertainty, a management reserve often is calculated simply as a percentage (5%, 10%,
or 15%, for example) of the cost of the project, to be tapped in an emergency and typically with
the approval of management, the project sponsor, or a steering committee. A management
reserve is broadly defined as: “An amount of the project budget withheld for management
control purposes. These are budgets reserved for unforeseen work that is within scope of the
project. The management reserve is not included in the performance measurement baseline”
(PMI, 2013, p. 545).

There often is confusion between a management reserve and a contingency reserve. In particular,
if a risk occurs on your project (an event or condition not incorporated in your base cost
estimate) and needs to be addressed, do you access funding from the management reserve or
contingency reserve? If a risk that you had anticipated occurs, then you utilize the contingency
reserves accordingly that were put in place for such a situation to fund the needed
mitigation/response activities.

If an unidentified risk occurs, the options may include: (1) addressing the situation with your
client, preferably through a change order or similar process that may be available (especially if
the risk is outside the scope of the project); (2) obtaining management approval to access a
management reserve that may have been included as part of your project's overall fee for this
purpose; or (3) reallocating any contingency reserves that may not be needed for previously
identified risks that no longer are expected to occur. Exhibit 3 outlines some of the important
differences between a contingency reserve and a management reserve.
Exhibit 3: Comparison of reserves.

Project managers often address the need for reserves through a management reserve, which is
much simpler and faster to develop than a contingency reserve. Or project managers may include
the potential cost for dealing with risks within the WBS tasks/activities that are to be undertaken
and the associated base cost estimate, rather than separately identify the risks and budget them as
contingency reserves. The downside of this approach is that both you and your management will
have less visibility into the risks that you may encounter, how you intend to mitigate them, and
what are the associated cost impacts.

Importantly, managers should avoid using either contingency or management reserves for scope
changes. Preferably, changes in scope are handled with your client through a separate change
order process. Both contingency reserves and management reserves normally are intended for
risks and uncertainties that may occur within the pre-existing, defined project scope. Only if, for
some reason, you had anticipated a specific scope change, included it on a risk register or
equivalent document, and established adequate contingency reserves to fund the
mitigation/response activities associated with the expected change, would you plan to access the
contingency reserves.

If you are concerned that your fixed-price quote cannot support including reserves, your best
option may be to specify, as completely as possible, the assumptions that you can live with for
performing the requirements at your proposed price. Attempt to bound and put sufficient
parameters around your carrying out the scope, such as in your technical approach and/or basis
of estimate, if applicable. In the process, remember that your proposal's technical approach and
any basis of estimate must be aligned.
What if including reserves may be perceived by your client as padding that will result in
unnecessary costs or losing the bid? It is certainly not in an organization's long-run interest to
submit fixed-price quotes that are based either on including costs that cannot be supported
(padding) or, alternatively, excluding costs that may be needed. By providing support and a
rationale for such activities and costs in a thoughtful technical approach, basis of estimate, or
equivalent document, as appropriate, your client may be more inclined to find them acceptable or
be willing to discuss the assumptions with you in negotiations. In some situations, it is possible
that reserves (or other funds set aside for potential scope changes) may be held—and released as
needed—by the client, perhaps when you are contracting with a government agency or
department.

Closing

Fixed-price contracts certainly are different from other contract types—in how risk is allocated
between you and the client, how you manage project costs, how you deal with the client, even in
how you treat the contract itself. The successful project manager understands the differences
among contract types and employs appropriate business practices throughout the project's life
cycle.

References

Gray, C. F. & Larson, E. W. (2014). Project management: The managerial process (6th ed.).
New York, NY: McGraw Hill.

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Originally published as a part of the 2015 PMI Global Proceedings – London, UK