How To Manage Fixed Price Quotes
In the previous video, I compared fixed price quoting to cost plus work and said that fixed price is the way to go – the professional, grown up, fair and lowest risk way to price up a job and manage any changes as a job progresses. I also said I’d explain how to manage a fixed price job. That’s what this video is.
When I tell my clients they should shift to fixed price quotes, I often get some resistance and it’s mostly around their concern that a job will take longer than they thought and they’ll lose out – lose money. (Nobody likes losing money, do they?).
So part of managing a fixed priced quoting environment is getting your quotes right. That’s another topic again and one I’ll return to another day. But I’ll say this – if you are systematic about how you price a job and you make a mistake that costs your money, you can fix your system and make sure you don’t make that mistake again. You can limit how much damage you can do and your quoting can get more and more accurate. It’s an iterative process and one that I’ll encourage you to put in place if I’m coaching you.
Another issue people have with a fixed price quote is that they’re just so expensive. By the time you’ve included everything and some contingency, the numbers are pretty big and you can be concerned you’ll scare the customer off.
Much easier (you might imagine) to explain your much less scary and reasonable hourly rate and margin and kind of fluff over the true total. Don’t pretend this isn’t tempting, I’ve seen it too many times. And it’s dangerous for the reasons I discussed in the last video – the potential for misunderstanding and wrongly set expectations around the true total cost.
2 Things You Need To Do To Manage Fixed Price Quotes Properly
So fixed price. Do it. And do it like this.
1. Be very clear
Be very clear about what you’re quoting for – what’s included and what’s excluded. Be clear about what provisional costs you’ve included (you know, for tiles or powers or whatever) and what happens if your customer decides they want fancier ones than you’ve allowed for.
Recommended Reading: Your Customers Want Certainty – You Should Give It To Them
Be clear what the scope is – exactly what your building or making for them and what not.
Be clear about the unknowns – if you specifically assume no rock when you dig, explain what happens if rock is found.
And be clear about variations – what happens when (not if) they change their minds about things or want upgrades along the way.
Remember, your naive customers (and possibly you’re naive commercial customers too) might not really know that difference between a fixed priced quote and the cost plus quote with an estimate.
Make sure they do and they’re clear that your quote is the fixed price one. Remember, the other trades businesses they’re talking to might be giving them a fixed price quote or they might not. They might be giving them a quote that when you look a bit closer, is really an estimate of the cost of services provided on a cost plus basis.
Encourage them to check – to look closely and ask the questions. Help them understand the difference. Make them understand that your fixed price quote protects them from things you hadn’t considered, mistakes you made in your quote, etc, (with the clear rules about what can change) whereas a cost plus quote (and contract – that’s important) doesn’t. It might look cheap but the estimate is just that – an estimate, there’s no commitment behind it.
A fixed-price quoting approach is one of your strongest weapons to help you reassure your customer that they’re in safe hands, being looked after and that they can trust you. And your clarity can put your competitors much less clear ‘quotes’ into stark relief. It’s a powerful sales tool, use it.
How to use Fixed Price Quote to protect you along the way
Whether you use written acceptance of your quote (with its terms and conditions attached) or a proper contract, you’re documentation should be very clear what the scope is, what you’re going to construct (doesn’t matter if it’s a house, a pool, a deck, a fence, or a bathroom, or a fit out), if there is any deviation from that scope for whatever reason, stop work.
Get clear on what the new scope is and document it. Then, prepare a quote (price could go up or down) and make the customer accept the change in writing before you go and do the new work. I know this sounds obvious but it happens again and again. The customer seems happy but there’s nothing in writing and later they’re not happy to pay the variation invoice.
People forget, you don’t want to stop work while you wait for the customer to accept the changes, so you carry on or you’re under pressure to meet a deadline and you don’t want to wait for a project manager to accept the changes.
You have to document it!
If you don’t document it and get documented acceptance, there’s a very good chance you won’t get paid. Remember that if you don’t do this and you don’t get paid, you only have yourself to blame.
The variations to the original scope can be because you found rock or rot or termites, because you found that more work was needed that you could not have foreseen (without doing chargeable work) but that you told your customer was possible, right?
They can because your customer chose the more expensive tiles or taps or because a design change suggested itself along the way.
It doesn’t matter why the original quoted scope gets varied – you need to document it.
I’ll finish off by commenting that you’re probably feeling like it’s a massive pain in the arse, too much red tape and documentation will get in the way of the job, jeopardise profitability or productivity or the relationship with your customer or something.
It’s necessary and it protects your money and your relationships. You have to do it.
There are four ways you can engage with me:
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3. Attend my next Tools Down workshop.
See you later.