Choice of Pricing model

There are several pricing models you can use in an ERP project.

Remember that a fixed price goes hand in hand with fixed scope; a price is only as “fixed” as the description of what is to be delivered!

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Fixed Price

A fixed-price model means that the price is predetermined, and the scope of consulting services is agreed upon up front. Payments are due according to the project’s progress as outlined in the agreed payment plan. Scope, time, and price are fixed, and the supplier holds the overall project management and delivery responsibility.

Advantages:

• Price certainty
• Payments follow project progress
• Supplier carries all risks
• Supplier is forced to be highly results-oriented

Disadvantages:

• Highest price due to the built-in risk premium
• Frequent discussions about scope
• Supplier will enforce strict scope management
• Mutually binding agreement – often non-terminable

Best suited when:

• The deliverables are very well defined
• Budget certainty is important
• There is little or no internal knowledge of the relevant systems
• The organization has limited internal experience with this type of project

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Time & Material (T&M)

T&M means that consulting services are billed based on time spent. A fixed hourly rate is agreed. Scope and time may be fixed or variable, while the price is variable. Either the supplier or the customer may hold overall project management responsibility, but delivery responsibility lies solely with the customer.

Advantages:

• Price can potentially be low, but can also become high
• Great flexibility to change the scope of the deliverables
• The agreement can often be terminated at short notice

Disadvantages:

• Requires strict management of the supplier to avoid delays and cost overruns
• The customer alone bears the risk for cost, time, and/or deliverables

Best suited when:

• The deliverables are not well defined or include many elements outside the supplier’s control
• There is strong internal knowledge of the relevant systems
• The organization has strong internal project management capabilities
• The supplier can easily be replaced if performance issues arise

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Target Price / Shared Risk / Bonus

This model means that budget, price, and scope of consulting services are agreed up front. A bonus is paid to the supplier if the project is delivered under budget, while the hourly rate is reduced if the project exceeds the budget. Scope and time are fixed, but the price may vary. The supplier has overall project management responsibility, while delivery responsibility is shared between customer and supplier.

Advantages:

• Potential for a lower price than with a fixed-price model
• Supplier is motivated to be highly results-oriented

Disadvantages:

• Requires strict scope management
• Risk of cost overrun
• Mutually binding agreement – often non-terminable

Best suited when:

• The deliverables are relatively well defined
• There is little or no internal knowledge of the relevant systems
• The organization has limited experience with this type of project

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Time Hire

In this model, consultants are hired for an agreed period at a fixed rate, e.g., per month. The customer manages and allocates the work and therefore holds full delivery responsibility.

Advantages:

• Lowest cost per hour because the supplier carries no risk and has high utilization certainty
• Maximum flexibility to change deliverables during the project

Disadvantages:

• No guarantee of results

Best suited when:

• There is limited uncertainty about what it takes to deliver the results
• There is strong trust in the supplier
• The primary need is access to resources

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So, what should you choose?

The consultant’s answer is: It depends… As in many other areas, there is no “one-size-fits-all.”