Some acquisition policies express a strong preference for fixed-price contracts in contracting. Firm-fixed-price contracts are depicted as existing on the extreme left of the continuum of risk. As we progress through the various fixed-price flavors and into cost-type contracts, the assertion is that risk shifts from the vendor to the supplier.
This assertion appears reasonable, but this belief makes the assumption that there is goodness that results in shifting risk to the supplier. Cost, schedule, and performance risk are only three of the characteristics the process of building a product, especially a software product or service.
Two weaknesses in the fixed price approach starts with the buying process be too simplistic regarding the uncertainties found in the contracts, and the almost universal misuse of language evolved from this overly simplistic view. Uncertainty is a complex concept. In the absence of omniscience, efforts to predict to any useful degree of certainty what events will have an effect the work and whether these uncertainties will occur require careful consideration and of course estimates needed to assess the presence and impacts of Epistemic and Aleatory uncertainties that create risk.
All Risk is Created by Uncertainty
It is common practice to consider the terms risk and uncertainty as synonymous. They are not.
The process of considering uncertainty are “risk analysis” and the work or margin needed to address the negative effects of uncertainty are “risk mitigation.” This general misuse of terms and the practice of placing all things associated with the concept of risk in one basket obfuscate the specific consequences of our decisions.
When these decisions, in the presence of risk, are NOT informed with estimates, we fail to realize that efforts to reduce or mitigate one aspect of risk often will have undesirable effects on other aspects of the project.
This fallacy is especially important in the software development world when we hear.
Here's a very simple cost definition process that requires #NoEstimates. I have a budget of 5K, therefore my cost will not surpass that sum. I will deliver as much value as I can (INCREMENTALLY) within that constraint. There! Just saved you countless days of arguing!
It is an illusion that risk is handled (mitigated for epistemic risk and margin for aleatory risk), by making the work fixed price. The risk, created by uncertainty, and its handling, must be paid for by someone. For a mature supplier, that handling cost will be baked into the fixed price for the work. For the buyer, the risk of not getting the needed business capabilities is assumed, so they must accept the cost to cover that risk in the fixed price.
The fixed price approach is touted as an approach to shift (cost) risk from the buyer to the seller. But this is not the whole story. A fixed-price approach clearly reduces price uncertainty. The buyer will pay the prenegotiated price and no more, although it may pay less if the work is terminated early. The wise supplier, will consider the uncertainty (by estimating the epistemic and aleatory uncertainty) of the final cost and adjust the final offer accordingly.
The supplier who consistently assumes all of the cost risk is not likely to be in business long.
So some cost risk is shifted back to the buyer in the form of a price premium for the supplier to survive. Even this premium does not account for all of the cost risks. Some of it is shifted to schedule or technical performance risk as well
The Fallacy
In High School we made our two children take an Economics class. Our daughter came home one day, and at the dinner table, where we recounted our day and had them talk about good and bad things that happen, she announced...
"Dad, we learned something important today in Econ class," What's that honey, "There is no such this as free."
If there is uncertainty, that uncertainty creates risk. Someone has to pay to handle that risk. If in the post from the #NoEstimates advocates says, I have a $5K budget, therefore my cost will not surpass that, it appears that the risk of showing up with the needed capabilities at the needed time has been ignored. If there is Not a needed set of capabilities and if those not-needed capabilities have no needed time, then the engagement is a simple time and materials Not To Exceed engagement, and he'll get what he gets for the NTE amount.
If that fine with the buyer, then yes, engage in a fixed price acquisition. I would suggest that work is also de minimus, so no one really cares when and what, only how much
