The fixed formula method in project management is a type of earned value method to measure the performance. It is an earned value method for assigning a percentage of the budget value for a particular work package to the start milestone. It has a remaining budget value percentage that is assigned once the work package is already completed.
For this particular method, a specified percentage is assigned from the beginning of the work package and the rest will be assigned during its completion. It is important for the project manager to include the specified percentage in the project management plan.
There are different rules that can be followed with this particular formula. For instance, both the project manager and the stakeholders can agree with the 0/100 rule which means that 100% of the budget value is given upon completion. They can also agree with the 20/80 and the 50/50 rules depending on the percentage that they have agreed on.
Since this method is aimed at determining the fixed price of the contract, there is no bargaining involved which is convenient for both parties. Moreover, the buyer can also set in advance an exact budget that he or she needs to spend for the entire project. By being aware of the cost of the project even if it hasn’t begun yet, the buyer can prepare beforehand. Lastly, it also helps contractors because they know what kind of deliverables they will provide based on the budget that they are allowed to get for the project.
While there are a lot of advantages for this particular process, the fixed price method also comes with some disadvantages. In fact, it is considered as less flexible especially when it comes to managing the change requests.
This term is defined in the 5th edition of the PMBOK.