Whether you are an independent consultant or part of a firm, when you are doing a proposal for a client, you have to decide which pricing model or fee structure to propose. This will define how you will be paid. You and your client need to agree on the fee structure and then write it into a contract.
The main goals of any fee structure are to:
Make sure you get paid not just for what you do but for the value of what you do for the client.
Eliminate or reduce future stress for you and your client.
Eliminate or reduce the time you spend doing things like contract amendments, which you do not get paid for!
There are 3 primary ways to charge clients:
Charging them a fixed price (or flat fee) for the entire scope of work.
Charging them for every hour that you work for them and any expenses.
Charging them a monthly retainer for the work you do for them.
There’s no one best way to do it. In this blog, I’ll talk about what a flat fee or fixed price is, the pros and cons of using that fee structure, and when I would suggest using it.
Flat Fee or Fixed Price
Sometimes called a project-based fee, this structure is based on an agreed upon scope and deliverables for a set price. You may get paid a set amount for the entire project or you may get paid based on completing a series of deliverables.
Pros
The benefit of fixed price is that it allows you to more easily set a price based on the perceived value of what you will do rather than what a client agrees that an hour of your time is worth. If you are a highly efficient consultant and know what it takes to deliver on the scope, you can do well under this type of fee structure.
Fixed-price projects can give you more time freedom as a consultant because your income is not tethered to each hour you work. It enables you to get paid for the value of what you do and lets you focus on creating that value for clients instead of counting up hours. Because it is a set amount, it also can be a predictable source of revenue for a consultant, which can reduce any stress you might have about cash flow.
Another benefit is that you can include an upfront payment into the contract or for deliverables or outcomes as you achieve them. This can help with cash flow too!
You can also include a bonus into the contract if you exceed the results that define success in this type of fee structure. I haven’t seen it a lot, but it makes sense, especially if the outcomes are quantifiable.
Cons
There are significant risks in this type of fee structure, especially for new consultants. You could end up being underpaid if you did not have the experience to develop a scope with clear assumptions with a client. If things come up that you didn’t expect—which happens a lot—it could take you more time to do the work. If you do not have control over the things you need to deliver on the project, it will be difficult for you to get the job done within the fixed fee amount. If the client changes the scope, you will have to tell them, “That’s not in scope,” which can create stress on both sides.
When I Would Do It
I admit that I rarely do a fixed fee, partly because the nature of the work I do inherently involves a lot of uncertainty. If I did work that was more technical in nature and there was a project that had a lot of certainty about what it takes to complete the work, I would definitely consider a fixed price. I would much rather be paid for the value of what I do.
I would consider fixed price for projects that are a week or two. Short durations would give less time for things like scope creep or uncertainty to impact my ability to get the project done on time and on budget.
I also would do a fixed price if I am charging a “day rate.” A day rate is when you get paid a set amount for an entire workday (often 7.5 hours) plus whatever your expenses are. This often is used for a discreet service, like a day at a client site or an onsite training.
I would need to know the client well. I have become very good at pricing my projects, but it took many years. Even with all my experience, I am off sometimes, sometimes by a lot. This is especially true if it is a client I don’t know well. So, to consider this fee structure I would need to know, for example, that they make good, quick decisions and then stick to them. I would need to know a precise process for a client approving my work and triggering my payment. I would have to have worked through all the project specifications and assumptions (and then put those in the contract). This latter point is important because, one of the keys to fixed-price projects is to minimize your risk. To do that, fixed-price projects usually take a lot of upfront work that is often not billable.
I also have helped create fixed-priced products like assessment tools. The prices for those are partly based on the costs to develop and market the product but mostly on the value in the market. If you develop and automate products so you don’t have to keep working on them with each client (e.g., offer an online tool), they can be an especially good way to increase your revenue while freeing up your time for other revenue-generating activities.
Always Get Paid for Your Value
Whatever fee structure you use, always, always, always make sure you get paid for all of the value you bring to the client. You are not just showing up to be a warm body for the client. You are giving them your expertise, intellectual property, insights, instincts, output, and more and helping them do things that they couldn’t do and would have difficulty doing without you. That value is worth a lot and you deserve to be paid accordingly.
Other Fee Structures
You can get more information on other types of fee structures by clicking on the links below.
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