In the procurement world, having a supplier provide a fixed price offers buyers a crucial advantage – certainty. With a predetermined cost for the entire project, buyers can confidently plan their budgets and make informed decisions. However, it's essential to recognise the risks that suppliers face when asked to fix a price for an extended period.
Suppliers operate in a dynamic business environment where unforeseen circumstances can impact costs. To safeguard themselves from unexpected events, suppliers often add a risk premium. The magnitude of this premium varies, typically and could be ranging from 5% to 10% or even more. Consequently, it is crucial to weigh the benefits and drawbacks of fixed pricing.
Advantages of a Fixed Price Approach:
1. Certainty: Opting for a fixed price provides clarity and predictability regarding budgeting and financial planning, giving buyers peace of mind.3. Simplified administration: With fixed pricing, detailed measurement and valuation of individual activities or items become unnecessary, reducing administrative complexity.
4. Straightforward contract management: A fixed price arrangement facilitates easier contract management, eliminating the need for continuous negotiations or rate adjustments.
🤷When to Choose a Fixed Price:
A fixed price arrangement is ideal when the scope of work is clear and well-defined, anticipated changes are minimal, and budget certainty is crucial. It ensures smooth project execution and allows stakeholders to focus on the desired outcomes.
💁♀️Considerations for Dynamic Projects:
In cases where project requirements are evolving, frequent changes are expected, or flexibility in scope adjustments is necessary, there may be better fits than a fixed price. Suppliers are more likely to add a premium to account for the unknowns in such scenarios.
🔍Exploring Pricing Options:
If you opt for a fixed price arrangement, requesting quotes from suppliers for both spot price and fixed price options can be beneficial. This allows you to assess whether certainty justifies the risk premium that a fixed price provides.
🙋♂️Leverage Our Advisory Services:
Our expert Advisory Services team specialises in procurement budgeting and supplier selection. We can guide you through the decision-making process and help you achieve optimal outcomes.
📞Talk to our Advisory Services team today https://www.paltd.com.au/contact
Source: Procurement Australia Advisory Services Team.
