Can Small Businesses Win With Fixed Bid Contracts?

Face it: if your business is still small and less proven than larger competitors, some clients will not sign any contract without knowing upfront what the job will cost. In fact, some clients refuse to sign anything but fixed bid contracts regardless of the size of a business.

Unless you are prepared to turn down work, you have to learn how to create and work with fixed bid contracts. You may not win every time, but you can learn how to avoid common pitfalls.

Recommendations for Quoting on a Fixed Bid Basis

There are two primary reasons why businesses can lose money on fixed bid contracts:

  • The quoting company fails to adequately analyze the true scope of the project, creating a bid that is too low.
  • The client adds or changes requirements while the work is in process. This is commonly known as scope creep, and it can quickly turn profits into losses.

Either issue signals a lack of detail in the bid and contract language. There is no shortcut method for avoiding losses; you have to take an organized approach to writing the bid — and spend enough time and effort to get it right. Here are some suggestions that can help.

Make Sure That You Understand Client Requirements in Detail

Never assume that an informal discussion revealed the results that the client truly expects. You have to delve into the details of each deliverable, the expected outcome and the milestones along the way.

Let’s say that a prospective client wants you to deliver their annual report on a specific date. This might seem fairly straightforward, but here you’ll need to nail down details such as these:

  • How many pages?
  • Will you provide photos and artwork? Black and white or color?
  • Will it require research, or will they provide all information?
  • Who will handle the printing? If you handle it, what kind of paper do they expect, how many copies and who pays for shipping?
  • When do they expect to receive a draft of the document? And, how many times do they want to review it before it goes final?

Without answers to every imaginable question, you cannot accurately quote the job, and you open your company up to a possible scope creep.

Assess Each Step of the Effort

Now that you know the project scope, you have to use it to prepare a preliminary project plan even before you write the bid. You can’t expect to make a profit, for example, if you don’t know the costs of the people who will be assigned to do the work, including outside contractors that you may need. Similarly, you have to allocate time to those people — and your own time — and recognize the bottlenecks that will affect the deadline and cost money along the way. Do I need to mention that you will also spend money on materials?

Depending on the complexity of the work that you do, the right project management software might be a great tool to help you get the details right.  There are many options out there, but you might want to check out our comparison of Trello and Asana to get started with your search. On the other hand, some people may get the answers they need using a white board — or a blank wall covered by sticky notes. It’s up to you.

Write a Detailed Bid

With a detailed project plan in hand, it’s time to write a formal bid. While bid language will inevitably become part of the contract, remember that bids are still open to negotiation.

Keep in mind that the bid is not a contract, so use the clearest format possible to deliver the information effectively to the prospective client. Many clients will appreciate  a list of tasks in a table or spreadsheet format. If you add an extra column for the client to include comments, you can use the table to get negotiation discussions started.

Your discretion governs how much detail you will include in the bid. That said, clients who know the details (such as the cost of labor, parts and other things that go into the job) can better understand the reasons behind the final bid. And, if they really want to go with your company, details can help you both eliminate unnecessary deliverables or extend deadlines to lower the bid and get you the job.

A word of advice: be sure to include scope-creep prevention language in the bid, rather than waiting to include it in the contract. This can include (but is not limited to) the following:

  • A definitive list of deliverables and deadlines
  • A statement indicating that extras and changes to the scope can be provided at an additional negotiated price
  • Revision limitations that specify how many times the client can review the deliverables

Of course, you know your industry and the types of issues that can arise, so you need to customize the language to suit your needs. Keep in mind that there are a number of good articles available to help find other ways to avoid or deal with scope creep. I recommend the Forbes article, 5 Tips for Preventing Scope Creep Without Losing Your Clients.

As for writing and organizing the bid, you might also be able to make use of some attractive templates from WordTemplatesOnline or search for others to kick start the writing process.

A Good Bid Makes Writing the Contract Easier

The final contract is essentially the bid wrapped in other legal specifications. Many of those specifications, such as payment terms and even a kill fee, if appropriate, might be standard. You might even have reusable standard contract language available, as long as it has a space for all terms of the bid as previously negotiated.

In other words, you will spend most of your time getting the bid just right. The rest of the contract is easy, as long as plenty of forethought went into it initially — and it has been carefully reviewed by a business contracts attorney.

Done Correctly, Fixed Bid Contracts are Winnable for All Parties

Sometimes, fixed bid contracts get a bum rap. You can definitely lose out if you don’t know how to control the variables. But, you will lose even more if you avoid making fixed bid deals entirely. This is paramount to donating good jobs to your competitors.

Try to get it right the first time, but consider any early losses as lessons that will make the next contract better. As long as your goal is to create a contract that provides clients with good value, fixed bid contracts can be a win-win for everyone.

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