How Do You Price & Bill?
For consultants, contractors, and other professionals How much money do you leave on the table, and how many jobs do you lose, by the way you price your work and send out invoices? This is a regular topic of discussion at our Business Group meetings. I’ve pulled together notes from several such discussions. It’s pretty long for a “newsletter” so scan down and see which topic hits your hot button. I invite you to respond with your own toughest question or challenge. If I choose yours, you get a free problemsolving session with me. Hourly or fixed fee? You should never work on a fixed fee for a poorly-defined project or one of unknown scope. Use an hourly rate (e.g., time and materials): – At the beginning of a job, before you have a handle on how much work there will be – For parts of the job that inherently cannot be defined (e.g., for landscapers, “rocks and roots;” for remodelers, dry rot under the tub; for bookkeepers and programmers, repairing the goofy things your predecessor did). Caution: an hourly rate with a cap on fees is the same as a fixed price agreement where you accept the downside risk but have no upside opportunity to make a larger profit if you are more efficient. When it’s safe to take a fixed fee, monthly fee or retainer: – For a routine continuing task – For a thoroughly definable new task – If your fee is fat enough to cover contingencies. How to define the scope of the job. Specify in writing exactly what will you do. What are the deliverables? What is not included in the scope? What do you charge for extras? Specify the add-on services you can make available (at an extra price, of course). Here are other terms of your client agreement that affect pricing and billing: – Duration of agreement or contract. – Payment terms. How much up-front deposit? When you will invoice and how soon they must pay. (Can you get final payment upon completion of service? Do you accept payment by credit card?) – Their responsibilities and timing. They must do what and by when? E.g., instead of saying, “We’ll complete Task A by the end of Week 3,” say, “We’ll complete Task A two weeks after we receive Dataset A from your staff.” – With whom you will interface and how? What happens if that person leaves the project or the client’s company? – How the contract can be terminated by either party – You reserve the right to raise your rates on an extended contract. Retainers? Sometimes the term “retainer” scares clients. It looks to them like an ongoing contractual commitment. (Have you seen the recent computer commercial where the consultant says with a sheepish grin, “We are contractually entangled”?) Instead, ask for a standard monthly commitment. “For a business your size, for your needs, you probably need about ________hours per month.” For an ongoing project, specify your regular scope of work. “For X hours we can probably handle the following tasks: ______.” These tasks for an ongoing retainer project probably fall into the following categories: 1. Right now problems to be solved, work to be done. This is what you’re being hired specifically to do. 2. Ongoing follow-up and support to ensure implementation. Not uppermost in the client’s mind, yet essential for success of the project. Variable schedule. 3. Proactive projects to be handled when other requirements are completed for the time being. (I.e., non-timesensitive things you do when urgent tasks are handled so that they don’t think you are just twiddling your thumbs and billing them.)
For an IT consultant, examples of these three might be, 1) Install new server and train the users, 2) Ongoing training and troubleshooting, 3) Download and install periodic upgrades. Your monthly billing should include time spent preparing reports, phone time, attending periodic meetings and reviews, managing the project, and doing research. Specify these in your contract. Client on phone: “I just had this great idea I’d like to run by you,” and then talks for twenty minutes. How much do you bill them for this interruption? You’d better specify phone time in your contract. Client: “I think we need another meeting to go over results.” You: “Great! Since we’ve already had our two meetings this month, we’ll need to bill for the additional time.” Avoid “scope creep.” List and describe all these carefully, so that you will know when some request falls outside the agreed-upon scope. Here’s scope creep: Clients asks, “Say, as long as you are here, could you also do blahdeblah?” with no offer to pay you extra. Your correct response: “I’d be delighted to do that, and it will only cost you a bit more! Let’s write up a change order.” Specify extra charges. For what things will the billing level be increased? Some examples: - Tasks outside the specified scope; special projects - Handling crises, emergencies - Delays and extra work caused by the client not meeting their agreements with you, e.g., they are a week late getting key info to you, but they still need your part by next Monday. - Rush work that requires you (or your employees) to work evenings or weekends or shift around scheduled work with other clients. Unless you’ve thoroughly defined the scope of the job up front, you and the client can’t even agree when extras are requested. Client: “You said you’d get this new accounting software up and running for $2,000.” You: “I didn’t realize I’d have to reconcile all your financial data from the last two years!” Different billing rates? You may be tempted to charge different rates for: a) Working a greater number of hours. Suppose your hourly rate is $150 for a small number of hours. For a larger number of hours, you may legitimately give a discount because your cost of marketing and administration is reduced as a percentage of the billing on that job. But it’s also fine to keep it at $150. b) Different tasks, e.g. tasks that require a different level of skills. For example, you may think you should charge a lower rate when you are doing lower-skilled tasks. But if so, you should also charge a much higher rate when you do your highest-skilled tasks. Often, thinking things through and coming up with excellent solutions to problems is the highest value you bring. Your rate should probably be $500 or $1,000 per hour at such times. Other times you’re essentially doing clerical work on the project. Perhaps your $150 per hour is the happy medium. If you are tempted to charge a lower rate for lower-skilled parts of the work, then it’s time to consider hiring or assigning a lower-skilled person to do that part and pay them half to a third of what you bill them out for. If the entire job seems worthy of only a lower rate, then it is probably not a good job for you. Should you bill for thinking? What if you wake up at 3:00 am with the million-dollar solution to your client’s problem? How much do you bill them? This could be the most valuable thing you do for them. (Make sure you turn the light on and write it down!) So if your job requires creative or analytical thinking, then bill for it per your contract. But how? “Debating and arguing, 2 hours. Mulling and stewing, 3 hours. Brilliant flash of insight, 5 seconds.” Should you bill for research? Some consultants say, “I’m the expert; they expect me to already know all this stuff, so how can I bill them for researching things for their job?” I question this belief. Are they hiring you because you already know everything, or for your ability to efficiently find out what they need to know? Ask your
attorney: do they bill you for the time they spend researching case law in all those books that line their office walls? You betcha! Obviously you must know the basics of your profession, but beyond that, bill for research. You might tell your client up-front about how much time you expect to spend on research. A rule of thumb: the more you are expected to know without looking it up, the higher your rate should be. Should you bill for travel time? To keep your business profitable, you have two choices: a) bill for travel time (yours and your employees’), or b) set rates high enough to incorporate unbilled travel time. Alternatives: - Don’t bill for travel time to nearby clients: only when travel time is greater than _______. - Don’t bill for travel time if you spend more than _____ hours per day on site. - Have clients come to you. Charge a lower rate if they come to you - Conduct some meetings via phone or do some work online. How to set your billing rate. What is the proper pay rate for a lead consultant? One consultant found that competitors charge $180–$210 per hour. $160 seemed too low: she wouldn’t be taken seriously. Perhaps $185 is right. Our recommendation to her: “Make the first digit 1 rather than 2.” As a small business owner, I know that whenever anyone quotes, say, $250 per hour, I think, “Whoa, that’s their corporate rate. I’d better look around some more.” Other ways of looking at pricing: – Value-added pricing approach. What is this job worth to them? What does it cost them not to have it done? Set your price based on this. There’s a huge difference between these two approaches: “This job will take 20 hours and my rate is $250.” “For $5,000 we can create you a website that will say to people you’re in the big league.” – What do the big guys charge? If the client doesn’t hire you, how much will they have to pay someone else for work of equal quality? If your rate is too much below this, they probably won’t hire you, because you don’t seem credible.