The Pitfalls of Fixed Bid RFPs in Complex Software Projects

Organizations in the public sector and state/local government (PS/SLG), often rely on a Request for Proposal (RFP) process to procure services from vendors. Much of this process and documentation around RFPs was initially focused on contracting and constructing projects. To keep costs under control, a “Fixed Bid” model was adopted. This model entails a predetermined project scope and a fixed price for the entire software development lifecycle.

While the fixed bid RFP can have some advantages, it poses challenges during an ERP implementation that should be carefully considered. In this blog, we will explore these challenges and shed light on a new approach with far greater success and potential benefits.

The FIXED BID fallacy

One of the primary advantages of the fixed bid RFP model can be the assurance of cost certainty. With a predefined budget, organizations can plan their finances accordingly and have a clear understanding of the financial commitment required for the project. This predictability can be particularly valuable for organizations with limited budgets or strict financial constraints. This also works best in a situation where the object or service being procured is limited in nature, such as a fixed good or service. When it comes to large and more complex projects like an ERP system, a fixed bid RFP is limited in the flexibility necessary for this type of service.

RFPs ask for the pricing and fixed bid prior to proper analysis and assessment. In a fixed bid RFP, there is a scope of work defined, but it is likely not an accurate representation of project truth. Once the bid is awarded and the project scope is officially established, the needs and costs can be wildly different from the starting point, and due to the restraint of the fixed bid, making changes or accommodating new requirements can be challenging. If the client desires modifications during the development process, it may lead to additional costs, delays, or strained relationships with the vendor.

A well-defined scope can help prevent misunderstandings and avoid scope creep during the development process, leading to more focused and efficient project execution. This enables both the client and the software vendor to have a shared understanding of the project requirements and deliverables.

Fixed bid competition with a price

Fixed bid RFPs facilitate a competitive environment among software vendors. By requesting fixed-price proposals, organizations can compare multiple vendor offerings based on cost, expertise, and value. This competitive landscape often leads to more favorable pricing and encourages vendors to present their best solutions to win the bid.

One downside to this is estimating the time and effort required to complete a software project accurately is inherently challenging, especially in complex or innovative endeavors. In a fixed bid RFP, vendors may feel pressured to provide lower estimates to win the bid, leading to potential underestimation or overestimation of the project’s actual cost and timeline. This can result in compromised quality or project delays and tension in the long run. Many organizations simply will not respond to RFPs requiring fixed bid costs for this reason. That leads to a possible loss of quality in the bid responses, missing out on a potentially viable solution.

With a fixed bid RFP, the responsibility for delivering the software project lies with the vendor. They are accountable for meeting the specified requirements within the agreed-upon budget and timeline. This incentivizes the vendor to diligently manage the project and deliver quality software, ensuring a higher level of accountability compared to other pricing models. However, fixed-bid RFPs often promote a transactional relationship between the client and the vendor. The focus is primarily on delivering the agreed-upon requirements within the defined budget and timeline. This approach may hinder collaboration and creative problem-solving, as the vendor might be reluctant to suggest alternative approaches or improvements outside the project scope. Another problem exists due to the changing nature of an ERP implementation. As areas get addressed such as supply chain or accounting, new challenges arise that require attention. With a fixed bid RFP, the rigid structure may hinder the ability to pivot or respond effectively to evolving business needs, potentially resulting in a solution that becomes outdated or less relevant by the time of delivery.

Finding a balance in RFP pricing responses

There is a better solution to a fixed bid in a software/services project – a time and materials model with a clearly defined “not to exceed” clause. This has been a very successful alternative in many ERP projects. The requesting organization gets some satisfaction that the initial quote for services based on the known scope at the time of a bid is there at a fixed cost but allows for the project to expand as needed without penalizing either side. By establishing a strong project team and leadership, the project can still navigate through the needed and approved updates without causing any concerns from the organization or the services provider.

The fixed bid RFP model does have advantages and disadvantages. With certain products and services, it provides cost certainty, scope clarity, competitive bidding, and project accountability, it can also limit flexibility, pose estimation challenges, reduce collaboration, and hinder adaptability. It is crucial for organizations to carefully evaluate their project requirements, risk tolerance, and priorities before deciding.

Are you ready to create the best possible RFP with maximum outcomes? We can help you work through the RFP creation process! Click here to request a consultation today.