Flat-Rate Prices for Technical Contracts

The latest trend in IT consulting work is flat-rate pricing. Under this scheme, the customer pays a fixed fee for work. A fixed portion of this fee is passed on to the contractor.

Flat rates are easier for the coordinating company, especially if the service is originated at a retailer, but can have negative implications for the contractor. When conditions are consistent, the flat rates have fewer problems. If, for example, every customer needed a service that required a similar amount of time, and a similar amount of travel expense, then a flat rate would be more logical.

To exacerbate the problem, some of the contracts include up to two visits. The logic is that one visit may be needed to determine a part requirement, and a second visit for installing the part. If the contractor works in a rural environment, travel expense can be important. If the customer is a hundred mile trip one-way, there is a potential for 400 miles of travel. This effectively discourages a contractor from accepting work orders from outside of a very conservative radius.

"When it comes to acquisition, government makes the rules. And, in a tough economy, contractors are more willing to adjust to those rules."

"True, firm-fixed-price contracts will result in a lower bid, particularly in today’s economy; but does this really result in better performance or better quality?" Mike Sullivan, Acquistion Solutions Inc., FederalTimes.com, June 22, 2009.

In a performance-based contracting environment, the business model must encourage the development of the incentive relationship. Incentives can define how the contractor will be rewarded for performance above the minimum quality levels. Disincentives define how the contractor will be penalized for performance below the minimum performance quality levels.

Incentive fees contingent upon the contractor meeting desired metrics can include the contractor sharing in the savings due to ingenuity or innovation, or reward the contractor for finishing a project early. Incentives should be in place to reward the contractor for the desired attributes of the contractor's role.

Quality assurance (QA) is critical to the successful management of incentive based contracts. When properly executed, QA can provide early warning of problems in the process.

Flat rate contracts distort the work environment. A contractor will often interact with a remote company, for example, to qualify communications. When working under flat rates, the remote company has little motivation to ensure that an efficient process is managed. If the contractor must wait on his phone for extended periods, why should the company care?

Under these conditions, contractors are encouraged to compromise the quantity of services delivered. A conscientious contractor will normally want to not only fix the primary problem, but do a quick overview of the system maintenance. With flat rates, this is discouraged. This results in mediocre service. If a top of the line TV would sell for the same price as a low quality TV, for how long would companies make high quality TVs?

A useful analogy would be a comparison to the gasoline price controls introduced during the Nixon administration. During the 1979 energy crisis (see photo), price controls resulted in a shortage of product. The artificially distorted market brought about lines at gas pumps and a shortage of gasoline. Hawaii tried a similar strategy in 2005-2006, with disastrous results. The same forces are at play with IT services.

2 Discussion:

Anonymous said...
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atti said...

This blog provide very nice information about the IT consulting work of which recently feature is flat rate pricing. Great work.
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