WA Consulting: Fixed price or hourly?

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Should WA consulting firms — or for that matter, conversion consulting firms, or management consulting firms — price by the hour or by the deliverable?

That was the question I started to discuss with Frank Demmler, who teaches in the Tepper Business School at CMU and is portfolio manager of Innovation Works. But we were cut off by time, and I never really got to tell him my problem (which is that my company mostly does fixed price work, and then works twice as hard as we should even if the customer doesn’t ask for it, just so that we delight the customer. Another one of my CMU-professor-friends, Economist Marty Gaynor, told me that this is a variation on “winner’s curse.” But I digress.)

I saw Frank yesterday again briefly, while on break from the Google Analytics Implementation seminar I taught across the hall, and then he sent me this advice on fixed price vs hourly:

Regarding pricing, as we discussed briefly, it’s a classic damned if you do, damned if you don’t conundrum. The granularity and visibility of hours is providing ammunition for an almost inevitable battle. A fixed price contract is one in which the client will rarely be satisfied and will claim that the contract included things that it didn’t.

One overriding comment is that you need to be disciplined and fairly aggressive to train your clients in either case. If it’s hourly, don’t allow yourself to get bogged down in the details. If there’s a substantive disagreement about project scope and resultants costs, that’s worth discussing. Otherwise, stand your ground and claim that you are a professional providing professional services and that’s what they cost. If they want to terminate the contract, so be it. Similarly, on flat fee project work, I’ve never seen a project that was correctly spec’ed out at the beginning. You’ll know when things are going off track. Rule of thumb is at the midpoint of the project, you should have a meeting to discuss progress and where changes have occurred that require an amendment to the existing contract and the fees for doing so.

I am hoping to talk to a lot of my friends this coming week about how to run a consulting company (but remember: not about prices themselves. That’s collusion.) So I wanted everyone to have the benefit of Frank’s thoughts.

Also, if you are a WAA member, you should read this article I wrote a week ago on the WAA site about the economics of running a WA consulting firm. I keep trying to pull the analytics for that page (does anybody read it beyond the eight people who starred it and the three who left comments?) but they make my computer crash. Every time.

Our owner and CEO, Robbin Steif, started LunaMetrics twelve years ago. She is a graduate of Harvard College and the Harvard Business School, and has served on the Board of Directors for the Digital Analytics Association. Robbin is a winner of a BusinessWomen First award, as well as a recent Diamond Award for business leadership. You should read her letter before you decide to work with us.

  • http://www.waomarketing.com/blog Jacques Warren

    Hi Robbin,

    In my case, I have practised the daily fee for years (even at Bell Canada). I give my clients an estimate of the job in day terms, and they can pay less or more depending on what is discovered along the way. I also include T&E in my fees most of the time.

    This model has been working very well; never heard a complaint nor had a bill challenged in more than 80 egagements.

  • http://www.lunametrics.com Robbin

    This is so interesting, Jacques. So do you say, “This is 10 days of work” and then when you keep your own accounting, you do it in hours (because sometimes you are only working on a client for one hour in a day, and you have to keep track of that) and then you bill them for 10 days work when it all is done. Or do you bill them for 11.5 if you spend 11.5? so is it daily with a guesstimate or fixed price?

    And is the beauty that you put it in daily format instead of hourly, so that they don’t feel like every hour is accounted for? (this is the part that might be so cool, because then you don’t seem to have the granularity and visibility of hours) and if you work for someone for 8 hours, do you consider that a day? Or is 10 hours a day? If you work for one person for 5 hours and another person for 5 hours on the same day, do they each get charged for half a day?

  • http://http:www.di-squad.com Tom “Bald Dog” Varjan

    I believe in charging for perceived value. That actually bears a relationship to the client. Clients know they get what they pay for. I’ve never seen any correlation between value and time. Besides, clients don’t buy time. They have business problems to solve.

    And time-based pricing promotes incompetency and ineffectiveness, while punishing greatness and proficiency: The more effectively I help you to get back on your feet, the less I get paid. I guess now we know why many lawyers love stretching out their engagements.

    Applying customised intellectual property (a.k.a. consulting) is not a linear process.

    But the problem is that for many people consulting means contract labour. I noticed this misconception even when I was working on my CMC in Canada. The instructor (MBA) kept emphasising that we get paid for the manual labour we perform FOR the client. And that clients use consultants to get the kind of work done which for which they have neither time nor inclination to do in-house.

    In Bill Kaine ‘s cartoon strip, Family Circus there is a little boy holding his homework out to his mother. She looks at him, a bit annoyed, and says, “You misunderstand. I’m a homework consultant, not a homework subcontractor.” That is, she can help him to do the homework, but she won’t do it FOR him.

    We just have to be very specific with value pricing because most clients are still trapped in the “hourly” paradigm. A few years ago a client withheld part of my fees because I didn’t spend enough time in the office although we achieved the objectives the engagement called for. I showed him the contract that it included no time, only objectives. And he said the time part of obvious so it wasn’t necessary to specify. No I specify that the contract and the payment are NOT subject to number of working hours.

    Well, life is a learning curve.

  • steve

    Very thought provoking Robbin!
    From the position of a buyer, I would argue that the main focus should be on the deliverable. Here is what I want done, do it by then. Tom’s comment that there weren’t enough hours at the office strikes me as … odd. I’d expect a minimal contact/hour at the office. Spending time at the office? That eats into my time, do enough of that and I could have done it myself!!!
    In the engagements we have of this nature, it is very much fixed price – and priced (higher) accordingly. If they can do a $50K project in 3 days? Good for them – we’re buying results, not speed.

    However, I myself am on an hourly rate. I won’t disagree with the generalisation by Tom that hourly rates promotes inefficiencies, but I *personally* regard that as a … challenge to do stuff so well, that they want me to hang around for more. Well I’m in my 6th year here so I must be doing something right. 😀

    Hourly works well (IMHO) when you expect lots of curve balls – eg plumbers on call out. When it’s more get in, do something, get out: a fixed price can be better. Perhaps a fixed price plus options to extend into hourly rates if the goal posts shuffle around? Similar to what Jacques seems to be suggesting?

    Cheers!
    – Steve

  • http://www.crsdata.com Kim

    Hi – I am hiring a retired trainer to moderate a customer workshop- he is unsure of what to charge- can anyone give me some advice on what to pay him? I want to be fair.
    Thanks!

  • Pingback: WA Consulting Fixed price or hourly Increasing your Website | debt solutions()

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