Whether you are an independent consultant or part of a firm, when you are creating 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 for every hour that you work for them and any expenses.
Charging them a monthly retainer for the work you do for them.
Charging them a flat fee (fixed price) for the entire scope of work.
There’s no one best way to do it. In this blog, I’ll talk about what an hourly rate is, the pros and cons of using that fee structure, and when I would suggest using it.
Hourly Rate
Sometimes called time and materials, with an hourly rate fee structure, you and the client agree on an hourly professional fee that you will charge. Independent consultants and firms generally have standard hourly rates they charge. Sometimes I see consultants vary their fees or offer discounts for, say, nonprofit organizations. But optimally, those are part of your standard fee structure and don’t vary a lot. The contract should also specify if you will be reimbursed for things like travel time, travel expenses, and materials and, if so, how much. For example, many consultants bill for travel at a lesser rate than professional rates. I always bill at least half my professional rates for travel because it takes up time that I could be using for billable work. Whatever you decide, it should be indicated in the contract so there are no surprises and so you get paid for all your costs!
Pros
The benefit of an hourly rate is that it helps ensure you will be paid for all the work you do. This is especially helpful when it is difficult to predict how much time you spend on a project. If there is a lot of uncertainty about what it will take to actually complete the work or if you suspect that the client may change the scope, hourly may be a better choice than other options. Why? Because if the work takes longer to complete or if the client increases your scope, you can get paid for those extra hours.
Hourly rates are also often easier for clients to wrap their heads around. They often expect that that’s how they will pay you. So, you generally won’t have to convince them to use this fee structure.
Cons
The main disadvantage of using hourly rates is that your revenue will always be limited by the number of hours you work. It diminishes your ability to scale your business or earn a higher income, unless you raise your rates or work more hours. This keeps you in the “trading your time for money” trap that will always limit your income, take away your time freedom, or eat away at your life balance.
The other disadvantage is that clients may think an hour of your time is worth your rate rather than the value of what you do for them. It can be a tough unit to assess because, to get a yes, they will need to embrace that your hourly rate includes more than your time. It includes your expertise, your experience, your intellectual property, etc. Many clients will only think of your rate as a unit of time. They will compare your rate to others in the market. Yet other folks may be able to provide far less value than you, including folks with “bargain basement” prices who provide little value.
While hourly-rate contracts can help you with engagements that are more difficult to predict, they also can be a less predictable source of revenue for you. If you get the work done faster than you expected or the client reduces the scope, you will capture less revenue than you expected.
When I would do it
With such an impassioned statement about the cons of hourly rates, you would think I would tell you to abandon them completely. Well, as with many things, it depends.
While I would much rather be paid strictly for the value of what I do, I often charge hourly rates because the work I do tends to involve a lot of uncertainty. That said, I’ve done it long enough that that uncertainty has decreased. I’ve seen a lot, and not much surprises me anymore. If I get a whiff that the client is uncertain about the scope upfront, then I know the gig will be less predictable and I choose a hourly-rate fee structure accordingly. But with the experience and precision I’ve developed defining scope and contracts with clients, I am now able to migrate more to fixed-priced—or value-based—contracts where I get paid a set amount for a project.
If you are choosing an hourly-rate fee structure and you don’t know the client well, which means unpredictability, you may want to stick with hourly rates. If you know the client well and have precise processes for delivering on the scope and/or if you have existing tools and templates that you can apply to the work, you might consider ditching hourly rates and doing a fixed-price contract. If there’s uncertainty but you think you can deliver within certain timeframes, I would more often than not suggest a retainer. A retainer can sometimes give you the best of both worlds. You get a fixed price per month so you can price it based on value and know you have income coming in. You can also put a cap on hours so that the scope doesn’t balloon beyond what you estimated. (See my links below to get more information on fixed-price and retainer fee structures.)
Always Get Paid for Your Value
Don’t forget, what you do as a consultant is valuable and you should be paid for that value, no matter what fee structure you use. You are helping clients do things that they couldn’t do 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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