Many enterprise buyers are looking for creative solutions to help control costs while getting the operational support they need to help drive policies, procedures and results with their statement-of-work projects. However, SOW operational costs can vary and are often complex.
SOW work engagements fall within two categories: projects and service engagements. SOW projects have a definitive start and end date and can be priced and paid upon achieving projects. Meanwhile, SOW services are ongoing and can be delivered for a fixed fee; they are not centered on a final deliverable but around the service provided on a periodic basis. Each category can be priced differently.
This article focuses on pricing models for SOW projects. Enterprise buyers have some options to consider when it comes to their SOW project management pricing models.
Percent of spend. This pricing strategy is based on the total bill rate of SOW spend and an agreed-to fee defined as a specific percent of the total bill rate. This model is often used when providers are rewarded for operational investments to drive strong SOW governance and strategy. There are a few things to consider with this type of pricing model, such as the ability for the business to absorb the cost and the potential spike in cost from smaller SOWs vs. larger SOWs.
Transactional-based fees. This pricing strategy is based on the number of transactions the operational support completes. Pricing can vary by transaction. These are dependent on what the transaction is specific to requirements and required skills to execute these transactions in the process. There are process steps within SOW that can require different types of skills before successful, measurable operation is achieved. There are several opportunities within the lifecycle of an SOW project where operational support can be provided. These opportunities can vary from one program to another and can be dependent on current structural models already in place. It is not uncommon for operational support to only include finance attributes such as payment, purchase order and/or budget management.
Depending on where operational support is required or needed, the resource allocation can vary. It is also important to have the capability to track SOW transactions to avoid confusion about the cost of operational support.
Cost-plus. Third-party SOW support can include a specific number of resources needed to support SOW activities. The pricing would be determined based on full burden pay rates (which include statutory fees and overall cost to employ someone) for the required resources with a “cost-plus” calculation used to determine pricing for this model. These resources’ costs can vary depending on the required skill and expertise needed to operationally support specific tasks. This model allows for the operational support of organization profitability regardless of volumes. The general calculation for this model is the total burden cost of the resources plus a markup.
Managed service (flat fee). Third-party SOW support is provided based on a flat fee for the determined services rendered. This model will help the buyer dictate cost in the most efficient way. The model is built on a contractual agreement for a flat fee that delivers an outcome based on operational support expectations. The operational support organization must have confidence in their flat fee to help them invest in successful operational support.
As you can see, there are many pricing options available for buyers — and each has potential strengths and weaknesses. It is important to consider the variables and determine which pricing model best supports you and your organization.