Pricing: Hourly or Fixed?
Pricing your projects right is one of the most challenging tasks for freelancers and small business owners. This challenge may be especially difficult for those professionals who are working in the design industry, where it can be very hard to predict how much time and effort will be needed for a project. Ultimately, pricing is a challenge because the client and the professional have opposite interests.
Pleasing the Professional – Hourly Pricing
From the perspective of the freelancer/small business owner, hourly pricing is ideal. You simply add up the amount of hours you spent working on a project, send the client an invoice, and get paid at your hourly rate. Most likely, you would also bill the client for any extra charges incurred on their behalf. This way, you legitimately earn the amount of money that you are worth (or, at least, what you think you’re worth).
Professionals also want to avoid getting trapped into a bottomless project. These projects require way more effort than they’re worth. Perhaps you vastly underestimate the time requirements of a project. Once you have signed a contract and agreed to a fixed quote, there may not be much you can do. Another common problem is scope creep- the tendency for project requirements and expectations to become ever more broad as the project progresses. With an hourly rate, scope creep is not much of a problem for the professional, because they can simply charge for the extra hours required to do the work.
Of course, this pricing model creates the sinister temptation to charge extra hours, to round up hours, and to take a rather liberal definition of ‘work hour’. Can you bill your client an hour of work because you thought about their project while running on the treadmill? The hourly model is simply not suited for truly motivating the professional to be efficient and productive. Obviously, professionals who pad their log sheets with reckless abandon will eventually be dropped, but the temptation to stretch the truth (even subconsciously) can still be very strong. Clients need to have a great deal of trust, and the professional needs to be very trustworthy, for this pricing scheme to work fairly.
Catering to the Client – Fixed Pricing
Clients want to know how much they will have to pay for a project. Smaller clients want to know that they will have enough money to take on the project, and larger clients want to be able to budget out their expenditures as accurately as possible. If you want to make your clients happy, then nine times out of ten you have to provide them a firm quote.
Plus, clients want to avoid the type of exaggeration discussed in the previous section. A fixed quote protects them from being overcharged. It also allows clients more latitude to change or expand upon the requirements for the project. If they think that the designer has done a poor job on an initial design comp, they might not need to pay for it. A fixed price therefore gives the client the upper hand in the business relationship. We’ve certainly been on the bad end of this deal, and certain clients have made us pay the price.
A Middle Ground?
Clients want to know how much they will have to pay for their project. Professionals want to be paid for every hour they work, regardless of the project cost. Can there be a solution to this conflict of interests?
Maybe. It is possible to develop a hybrid model that meets the needs of both. The professional can provide a provisional quote of a project based on an estimate of the number of hours the project is going to require. This quote is not set in stone, however, and the cost at the end of the day may be higher or lower than the set amount. If clients are still weary of this setup, then perhaps you can guarantee that the final price will be within 10 or 20% of the quote. The less room for error, though, the more accurate you must be with your estimate of the time you’ll need to spend on the project.
As our company has developed, our pricing method has been all over the map. We started out with fixed quotes- this, however, was back when we naively thought that we could create a successful business model by drastically undercharging for our services (note: this doesn’t work!) Later, we flirted with the temptation to convert to a strictly hourly setup. In fact, many freelancers refuse to do it any other way. But, ultimately, this was just not always realistic or fair for the clients. So, we’ve settled on trying to use a hybrid model for most of our clients.
Pricing Honestly and Accurately
Whatever pricing method you use, two things are essential: you must strive to price accurately and to price honestly.
Accuracy
Pricing accurately is based on knowing the amount of time and effort you will need to spend on a project. To a large degree this is simply based on experience. That’s why it’s important to always track how much time you actually spend on a project, even if you have already agreed to a fixed quote, or even if you are doing something free (like some nonprofit project, and internal site redesign, or that website for your grandma). Compare your prediction with your results. There are some online tools that can help you do this too- we use Basecamp to track our time but you may want to try a dedicated service like Harvest Eventually, you will get better at making predictions of the time required for projects.
Another important technique- break the project down into its smaller components. When we are quoting a web site design, we break the process down into the following components;
- Creation of the Information Architecture
- Wireframing
- Design Comps
- Coding the HTML/CSS
- Programming
- Debugging
- Cross-Browsering
Considering the project in smaller chunks makes it a lot easier to estimate the time requirements.
Honesty
Honesty is important for any business relationship. As a freelancer, there is a temptation to exaggerate the amount of hours you have worked. As a client, there is a temptation to expand the requirements for the project and work your designer to death. This is what creates all sorts of distrust between clients and professionals. But if you want a truly productive and satisfying relationship, you will need to trust each other. At the end of the day, if both parties are honest and fair about the project, pricing should not be a big problem.
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RedditTags: Client Relationship, Pricing, Quotes, Scope Creep
Posted in Miscellaneous, Project Management 11 Comments »
“The hourly model is simply not suited for truly motivating the professional to be efficient and productive”: I beg to differ on this one, the hourly rate is much more motivating than the fixed rate. The fixed rate almost always suffers from Scope Creep, which is not a problem for the hourly rate where the client does not really want to have changes (so that s/he won’t pay more). Fixed rate can be very frustrating when it comes to this.
When you charge by the hours, you will have the advantage of billing on deliverables, which is great for both the customer and the contractor (the client does not pay a huge bill at once, and the contractor will receive a constant stream of money).
Back to the scope creep, I would like to suggest this excellent series on scope creep.
I usually send a fixed rate for the project, but include a clause where any extra work will represent extra cost. This is what has worked best for me, even with the ocassional scope creep.
PM Hut,
You’re definitely right about the scope creep problem, which I consider to be the biggest difficulty with fixed pricing. You make a good point that hourly rates can also work to the advantage of the client if you bill them frequently, so they don’t get hit with a massive bill they are not expecting. Perhaps this point can be used as a selling point to convince clients to accept hourly billing.
Rafyta,
That’s a pretty good solution, as long as your clients know up front what they are getting into. I doubt that the scope creep problem can ever be eliminated completely- and perhaps it shouldn’t be, but I think the goal of a good pricing and project management scheme is to keep it within a reasonable level so that neither party suffers.
I think oDesk has solved this prob upto good extent.
I have few guys working for me on mix solution. I think freelance sites like Elance & oDesk do’s the trick for us.
Japan Website
Thanks for a great article. I’m trying to get in the business, so this was a helpful read. Thanks once again!
Hybrid. Fixed price with a real tight scope. When something gets out of scope reevaluate and renegotiate. Takes more time to clearly define what services will be performed but well worth it.
fixed price is more easy to set up, but it’s not necessary the best solution. For example as a freelancer I ask 250 Euros for a flash website like that : http://www.customizingwebsite.com/
We recently switched to fixed rate pricing, including a 30 day warranty. Clients love this.
However, as clients also love scope creeping, it’s been very important to clearly state exactly what the end deliverables will be, and that anything outside the scope of that work will be charged extra, either at an hourly rate or as an additional contract.
The warranty is also clearly stated as anything directly related to the work completed. You get very used to saying “We’d love to do that, but be aware it’s out of scope…”
Fixed pricing works very well with Agile development methodologies as these break a project up into 2 week “sprints” which can easily be estimated, budgeted for and expanded by just adding another 2 week sprint to the end of the dev cycle to add new features.
It’s also easier to mix and match the different billing techniques of your subcontractors when billing at a fixed price.
Wow, you explained our entire billing growth cycle. We just migrated over to the hybrid model a few months ago after going through exactly what you’ve described (except for the over billing part of course). Great stuff, I’m passing your post around.
HourDoc is tool for Time Tracking. http://www.HourDoc.com is right treatment for time and labor management processes has to be an easy-to-administer and affordable solution for Freelancers, supervisors, employees and HR and payroll managers. They offer free application to companies less than 50 employees.