Like many other industries, clinical research aims to maximize efficiency and productivity while minimizing risks and costs. CROs are not exempt from this, as the goal is to augment a sponsor’s return on investment and return quality results.
One essential component of a clinical research project is its finances. A competent CRO can work within budget constraints to deliver results on schedule – all by following the most optimal pricing model, such as fixed-fee pricing. But while the status quo for some time was variable pricing, sponsors are now seeking a more cost-effective and transparent finance model.
That’s where fixed-fee pricing comes in.
What is a CRO?
When medical research institutions engage in drug discovery and clinical trials, they may outsource different functions and processes to a CRO – a contract research organization. These organizations act as support for biotech and pharmaceutical companies (called “sponsors”) by providing their clinical research services.
Different organizations offer varying levels of service. Some CROs are full-service, while others choose to specialize in one function or medical field. There are many types of CROs, from disease-specific organizations to ones that focus on laboratory sciences.
CRO Variable Pricing Models: The FTE Standard
Many companies across various industries implement what is called a “variable pricing model.” Variable pricing, also known as full-time equivalent (FTE), involves a company charging per full-time hour based on an agreed-upon rate. It’s similar to the concept of “billable hours” for lawyers.
The issue with using FTE as a standard pricing model is the unpredictability of the final cost. Drug discovery and clinical trials are susceptible to fluctuations in regulatory, functional, and internal changes – all of which could result in more full-time working hours as the project expands. This drives up the cost of the CRO’s services and eats into the sponsor’s budget.
An hour-based pricing model also risks organizations increasing their hours or deliberately charging at more senior levels for more profit – to the detriment of the sponsor.
One other issue that comes up when charging by the hour is the change order.
Change Orders and Their Disadvantages
When sponsors outsource their functions to CROs, the two enter into a contract. This contract establishes all the relevant services that the sponsor requires, as well as the resources that the CRO will provide. However, since drug discovery and clinical trials are not static projects, there may be changes to this contract as the sponsor requests more services or the CRO recommends additional courses of action.
This documented amendment to the contract is called a “change order.” A sponsor or CRO will submit a change order, which both parties will review, then approve or reject. Following this, the CRO will determine how to reallocate resources, adjust workflows, and gain regulatory approval.
A single change order may not cause too many complications, but CROs are likely to encounter multiple instances where the scope of the project changes or broadens. And with each change order halting the progress of the clinical research, this decreases efficiency and delays the project.
This constant flux in cost means there is a lack of transparency in project execution since the true cost of the project is ambiguous. It is also difficult to establish expectations regarding timelines, resources, and budget.
Moreover, some CROs may intentionally underbid to win the project, then later drive up the costs – and therefore profits – with change orders. This puts the sponsors at a disadvantage.
Fixed-Fee Pricing as a Solution
To solve the challenges of a variable pricing model, CROs are beginning to introduce “fixed-fee pricing.” The CRO will charge a singular, flat fee for its services based on its estimations, regardless of the actual time and resources consumed. The fee will also account for any potential change orders and alterations.
Benefits of a Fixed-Fee Pricing Model
A fixed-fee pricing model gives sponsors more advantages – particularly for emerging companies and start-ups. Since these sponsors have smaller budgets and limited ability to absorb changes in cost, paying a flat fee allows them to budget appropriately without fear of being hit by further expenses down the road.
Moreover, biotech and pharmaceutical companies can avoid getting charged for changes that are out of their control – or ones that the CRO should have anticipated from the beginning. This is especially beneficial with the global economy in such a state of uncertainty and instability, which makes minimizing overheads all the more important.
This pricing model helps build trust between the CRO and the sponsor, which allows both parties to establish realistic expectations. The two parties share accountability regarding the project’s risks as well. And, of course, it gives sponsors more control over the financial output.
With a fixed-fee pricing model, a CRO can build a more transparent and mutually beneficial relationship with the sponsor. It eliminates uncomfortable negotiations over finances, leaving the CRO to focus on what is essential – its clinical research services – in order to maximize the return on investment (ROI) for the sponsor.
Challenges of Fixed-Fee Pricing
Of course, the fixed-fee pricing model is not entirely risk-free. For example, sponsors may choose to outsource to other countries where the fee is lower due to exchange rates. This may compromise the quality of the study’s results since the sponsor is attempting to reduce its overheads.
Moreover, with a fixed budget, CROs have limited chances to request additional funding or integrate additional services. While the CRO is responsible for anticipating potential project alterations, it cannot realistically plan for all scenarios. The flat fee could prevent them from conducting further research or tests due to limited resources, which would, in turn, compromise the project’s results.
An underbudgeted flat fee also increases the risk of the sponsor’s clinical research project failing should the CRO be unable to conclude the research and trials. However, these challenges should be anticipated and discussed with agreed-upon plans during initial discussions and added to the contract to avoid any delays.
Maximize ROI with Fixed-Fee CROs
In the end, however, the benefits of a fixed-fee pricing model outweigh the potential disadvantages. It allows the sponsor and CRO to enter a partnership built on a solid financial foundation. Now, more and more CROs are switching to a fixed-fee pricing model for the benefit of themselves and their sponsors.
Vial is a tech-enabled, next-generation CRO that offers affordable fixed-fee pricing for clinical trials of all sizes. We deliver faster and better trials for sponsors with up to 50% lower costs – maximizing ROI while minimizing overheads. Partner with Vial for all your clinical trial management needs, and contact us today.