PMean: Charging by the hour versus charging by the project

I was talking about pricing models for consulting in an email exchange and I thought I’d extract some of those comments for this blog. When you are an independent consultant, you need to decide whether you will charge by the hour or charge a flat fee for the entire project.

I normally charge by the hour, and it makes sense for many of the people that I work with. A lot of the work is providing answers as needed to guide someone through the process of getting a dissertation completed. The model works best when neither you nor your client have a good idea of what is specifically needed. It also works well when you can produce something of concrete value on a regular and on-going basis.

Consulting by the hour does not make sense when the projects are big and you are producing a single product at the end of the contract. Your client starts to worry when the hourly bills keep adding up and they start to worry that maybe they are throwing their money down a black hole.

As a consultant, you should always work to show visible signs of progress throughout the duration of your contract, but this is easier for some projects than for others.

Even though I have not used a fixed price model for my consulting it has a lot of advantages. It gets your client to think in terms of the value that you provide. It also avoids an embarassing comparison to lawyers and accountants, who also usually charge an hourly rate. I make more than the typical lawyer or accountant, and I don’t apologize for it, but it does lead to sticker shock.

The key to a fixed price model is getting a detailed scope of work defined. Your client may or may not be able to give you a detailed scope of work, but you do have the option of charging a certain fee to help them produce a detailed scope of work. Once that is done, you can offer a price for the contract, and if your client thinks it is too much, then you’re sad at what you missed out on, but you do have compensation for the time that you spent.

A detailed scope of work provides protection for both you and your client. If you are working as a consultant, you want to avoid mission creep, the adding of “just one more thing” that ends up piling up more and more time on a project that you thought you could finish in a week and now it’s streatching out over several months.

A detailed scope of work protects your client, as well. By spelling out in detail what your client needs, They get the assurance that you won’t cut any corners.

If you charge by the project, be sure to ask for some of the money up front, before you start your work and more of the money as you reach one or more mid-project milestones.