FPPs – Getting Paid and Getting Out

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I’ve listed so many risks associated with Fixed Price Projects (FPPs) that you may well have decided to avoid them entirely. That would be a mistake. If approached carefully, and with reasonableness on both sides of the contract, an FPP can be both profitable and the beginning of a long and mutually beneficial relationship, based on trust and understanding.

As well as all the other risks inherent in and FPP there is also the risk of not getting paid for it, or not being paid on time. This is a much greater risk in FPPs than in time and materials projects.

Not what you want to be doing…..

getting paid

Payment Terms

Most fixed price projects involve payment terms based on phase completion or the delivery of components of the project. There are many risks in this:

 

  • A client may unreasonably withhold confirmation of delivery or completion of a phase, and yet allow other phases to continue
  • A client may halt or suspend the project

 

In both cases you may have difficulty in obtaining payment.

 

Include a clause such as this in your contract:

 

‘Where payment is dependent on acceptance of the completion of a phase or upon delivery of stipulated components of the project you may withhold acceptance if grounds are reasonable. In such cases it is essential that you put in writing your reasons for withholding acceptance. You also agree to provide us with immediate opportunity for clarification and remedy. If you do not do so within two weeks of delivery or completion of a phase then you agree to pay us as if you have accepted the phase or delivery. Furthermore you agree that other phases and deliverables may be suspended until payment is made. You also agree that during the period of remedy, however long, and until payment is made, later phases of the project will be delayed and deliveries suspended.’

It’s also vitally important that you build in to your contract and into your project plan an (albeit early) option to escape.

 

Getting Out

 

If you can persuade your customer to engage in a serious design phase for the project so that final estimates can be made on the basis of clarified requirements, then do so. You will save money and reduce risk, even if you pay for half the days yourself. You will probably have put forward an initial estimate, of say 100 days, and you may find that you arrive at a new estimate of 200. In this case you must make sure that both the customer and you can extricate yourselves form the contract. You must have a phrase such as this:

 

‘We have made estimates on the basis of the discussions we have with you, and assuming certain circumstances, intentions and needs. Those assumptions that might materially affect our estimates are documented. Following an initial design and estimation phase of the project we may find that some material assumptions are false, and that other circumstances are not as we understand them now, and in this case we may revise our estimate. Both you and we reserve the right to withdraw from the project at this stage, or to renegotiate the scope of the contract.’

 

Your client may try to argue that in this case he has spent money for nothing, but you should and can very reasonably argue that he will have obtained a very much more precise idea of what an implementation project involves, and what can be done in the specified time. This represents real value.

See also:

FPP – A Frightening Acronym

FPP – Estimating Fixed Price Projects

FPPs – Mitigating Some of the Risks

FPPs – More Pitfalls to Avoid

FPPs – Yet More Thoughts on What Could Go Wrong

Getting Paid. Can You Appeal to Your Debtor’s Conscience?

There are moves afoot in the UK (Late Payment Tsar) to make it easier for small companies to persuade big companies to pay their bills on time. Whilst there are, of course, many wonderful advantages in running a small company, getting paid quickly isn’t one of them.

Some large companies, especially those in the retail trade, even demand a fee from their suppliers for the privilege of being a supplier, and payment terms when you do business with big corporations are not always kind, and whatever they are, they are very often breached. We accept this troublesome behaviour because we need these big companies to be our customers, not only because they enhance our reputation, but because business with them, if we do a good job, can grow and grow.

unpaid invoices

Fortunately, most of the international companies LLP Group works for are reasonable and fair, but there are sometimes exceptions. One of them is a global company that owes us a very large sum that should have paid at least three months ago. The sum covers software ‘maintenance’, and it is properly contracted, with fully agreed terms.

The difficulty currently lies in finding the people who can authorise payment. You must jump through hoops to win a deal, more hoops to sign a contract, and finally, when it comes to billing and getting paid, you can’t even find the hoops to jump through. Furthermore, people come and go in large international organisations and it’s often difficult just to find out on whose desk your invoice is sitting and who can sign it off.

But what can you do? Do you suspend services, do you threaten legal action, do you become unpleasant or moralistic?

In the case we’re wrestling with, we’ve already paid half the amount to our software supplier, who is ultimately responsible for software corrections and debugging. They’re a large and tough company too, and our contractual terms with them demand that we pay them even if we haven’t been paid ourselves. So we’re caught in the middle.

In recent days I’ve discussed the issue with our managing director, who’s responsible for the relationship both with the customer and our supplier, and we arrived at two slightly different views as to how to put pressure on our customer. I take the view that ‘moral obligation’ can be persuasive, and that if we tell our customer that we’ve already had to pay our supplier on his behalf, our customer will feel moral pressure to pay. I somehow trust to good nature. He, on the other hand, believes that if we tell them we’ve paid our supplier, then they will no longer feel they need do anything at all, since software ‘support’ has been bought, albeit by us, not them.

Does it depend on the nationality or the culture of the debtor? Perhaps. I may be old-fashioned in believing that business has a moral dimension, but I think it’s something one can and must occasionally point out.