Generally, the more experience you have as an independent consultant, the more likely you should move from billing by the hour to a fixed fee. At some point you’ll master your specialty and work much more efficiently than others. This means to earn what your services are truly worth, you’ll have to keep raising your hourly rates. But at some point, you’ll reach an invisible rate ceiling when clients think you’re too expensive, even if it takes you half the time to do the work.
When you reach this point, it’s time to start thinking about billing for your services by the project instead of by the hour or day. The idea is to price the project as if you’re going to do it from scratch, even though you know you’re going to adapt plans and materials from prior projects. By doing so, you’ll boost your income per hour.
Here’s an example. An executive wants to hire you to help gauge how receptive his leadership team will be to a strategic shift he’s contemplating. You’ve done this type of work dozens of times and know what doing the assessment requires. You know you’re going to have to interview each of the division heads and other functional leaders, but you can leverage the interview questions from the last assessment you did. Plus, you’ve developed a good system for interpreting interview data. You also have a survey you can adapt to get needed data from other stakeholders. For the final summary report, you’ll re-use a template you’ve refined over your last few projects.
You figure you can do the project in 40 hours, but if you had to create everything from scratch, it would probably take 60. If you bill by the hour and it takes you 40 hours, you’ll make $12,000 based on your rate of $300/hour. But if you bill using an estimated total time of 60 hours, you’ll make $18,000, or $450/hour. (60 hours x $300 = $18,000, then divide by 40 hours to get $450/hour.)
When to consider fixed-fee pricing
If the project scope is extremely solid and it’s at least 95% in your hands to control the timing and outcome, a fixed fee might be a good idea. For example, facilitation, workshops, coaching engagements, and possibly assessments.
Do not quote a fixed fee when you’re a member of a larger team or if technology changes are involved — you can’t control the timing or final outcome.
In priority order, here’s a list of considerations to evaluate if a fixed-fee price is a good idea.
A. Is there a definitive deliverable? For example, a report, plan, assessment, workshop, list of recommendations, or a specific number of coaching sessions. If the end result is more nebulous like “ensure a smooth transition to a system or process,” quote a an hourly or day rate instead.
B. What percentage of the work is in my hands to control? Using a fixed fee is risky if team members or project workstreams can impact your ability to deliver the desired outcome on time. Also consider if your work will depend on client input from stakeholders or SMEs (subject matter experts). If they keep putting you off, how will that impact your ability to deliver?
C. What is the duration of the work? Longer time frames mean more things can go wrong or be delayed. I’ve seen consultants quote a fixed fee for a full-day workshop but after the workshop was postponed twice, they started to feel their profitability shrink.
D. Do I have a lot of materials I can leverage for this work? Obviously, the fewer things you have to create from scratch, the faster you can complete the work. Being able to leverage your prior work is key to increasing your effective per-hour rate.
E. How long would it take me to do this work if I had to build it from scratch? This will help you figure out a fair price. Since you’ve done this type of work before, you probably have a good idea. On the other hand, if you’re uncertain, bill by the hour or day for now, and start tracking your time for different types of project outcomes so you’ll know what to charge when a fixed-fee opportunity comes along.
Tip: If you do use a fixed fee, add a clause in your contract that any and all work outside the predetermined scope is subject to your hourly rate.
Of course, the main advantage of quoting a fixed fee is to increase how much you earn per hour. It’s also easier to bill in installments, including a down payment, so you can get cash flowing sooner. Another advantage is you don’t have to track your time, although it’s a good idea so you can see if you priced the work appropriately.
On the other hand, if you underestimate the time it takes, your effective hourly pay rate may end up being even lower than your usual billable rate.
We all know that pricing consulting services is more art than science. If you’re an experienced consultant, it may be time to get a little more creative.