Fixed Fee vs. Hourly Billing
External consultants have to decide how they're going to bill their clients. There are only two options: fixed fee or hourly.
The big consulting firms along with other professions such as lawyers and accountants generally take the hourly approach. This provides them the flexibility they need to step in and out of projects as needed. This approach is also good for those who are involved in project management related duties.
Smaller projects are often done as fixed fee. This structure works with some projects since it can provide a minimum dollar amount that the consultant can rely on while giving the client some assurance of what the maximum project cost will be.
Thoughts on Billing by the Hour
- Frequently understates the value of your services to the client.
- The client is uncertain as to the cost he or she must budget for the engagement.
- Many consulting tasks such as relationship building, proposals, learning new productivity software are difficult to cost-justify on an hourly basis.
- There are limited numbers of hours per year to bill.
Thoughts on Fixed Fee Billing
- You maximize the value of your intellectual capital as well as your tangible, time-bound activities.
- The client doesn't feel they have to micro-manage your billing hours. You avoid the common complaint of being “nickeled and dimed” in billings.
- A percentage of a single bottom-line result for the client may easily exceed a year's hourly billings.
- The client feels you are more of a partner in the results. Your commitment to efficiency is evident.
If you're experienced and are able to accurately assess the amount of work needed for a project, you're better of going with a fixed fee arrangement. However, if you suspect that the scope of the project will change over time, going hourly can offer you some protection from working for free.
Fixed fee is very difficult to justify for a firm unless the scope of the project is very well defined. I've found that a requirements gathering project is best to do on an hourly basis. Once those requirements are defined and the scope of a resulting implementation is understood, a fixed fee project can be proposed. There is considerable risk for the firm on fixed fee if the scope is not well managed. I usually recommend adding 5-10% more in contingency on a fixed fee project to protect us from the risk.