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Fixed Cost vs. Time and Materials
July 4, 2009 | 1 Comment
In Professional Services terms there are two general ways of pricing a project:
| Fixed Cost | Time and Materials | |
|---|---|---|
| Unit of Cost | Project | Time (hour or day) |
| Most Risk | Consultant | Client |
| When to do it | Clear Expectations | No Fixed Set of Requirements |
Fixed Cost is preferable in many situations. Alan Weiss agrees on his consulting books. Some of the reasons why:
- Provide Value – Not Time. You want to be known for the things you fix, or the things you create, or the money you save, or the money you enable a company to make. You do not want to be known as just Joe the Carpenter, Plumber, or Java Guru who happens to be cheap.
- Eliminate Competition. You want people calling by your name: you or no one else. You do not want people to compare you with other similarly qualified consultants, and you do not want to compete solely on an hourly price number.
- You should Charge Heavily for What You Know - leave the tasks that you do not know to other people. One of the reasons that many people are reluctant to increase an hourly rate to a Consultant is because they think that he/she may not really know what they are doing and may spend lots of time on the job learning how to do it.
- Don’t cap your yearly pay. You only have 24 hours in a day, and you only have 200 working days on a year. You do not want to limit yourself.
- Lack of Control. On an hourly job, the client may see you closer to an employee than a consultant. He/she may be directing you as to what to do. However, one of the reasons you launched your practice was because you believe that you know and have more experience than most clients — at least on what you do on your practice. Success depends on being able to take decissions on how something gets done.
- Lack of Trust. A client that pays by the hour is not showing trust. Nothing wrong with that – no one should be forced to trust someone else. However, you need trust in a business relationship. Trust leads to large engagements. A client showing lack of trust is not a good sign. Your reputation may not precede you as much as you thought.
- Difficult to SubContract on a Time and Materials gig; at least for small teams. Big companies do it very well. However, on a small team, clients may expect that for every hour paid, they get one hour of your time (or the main consultant’s time).
- False Expectations. Once you give a Time and Materials estimate, the customer may want to hold you up to it. The customer may approve a maximum payment ammount for the estimate ammount. It may not be easy to charge for any unexpected work. The whole point of a Time and Materials quote was to offload the risk into the client’s shoulder – but they may not want to bear it.
Other bloggers writing about Fixed Price vs. Time and Materials:
- John Murray
- Ajarn’s SQL Corner
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