I just wanted to see how some of you guys address a clients concerns that by billing hourly, they aren’t going to know what was done in the allotted time, or how much time it really takes to do something.
There have been many times in the past where a project was sold for a fixed price, and it wound up going much further then it should have. Switching to hourly can help this, as well as giving us the ability to charge for lengthy phone meetings and on-call support which we currently wind up handling for free most of the time.
So, when you get to the billing terms for a project, how do you make the client (or potential client) feel comfortable with the hourly billing prospect? What do you tell them to assure them that it’s a fair option for them?
Also, if you bill hourly, do you still take a minimum deposit up front for the work (A percentage of the estimate perhaps?) or do you just collect the payment info on the spot so you can bill them as the project goes on?
You estimate the project conservatively and give them a projected price based on that estimate. Explain to them that although you could go over, there is a good chance that you’ll go under and they’ll save money. Explain that if they make changes along they way, they can save themselves money in addition to spending more (i.e. if they drop a feature). Explain that if something is much easier than you thought, they save money. Explain that on a fixed bid project, when you start reaching your estimated hours you aren’t getting paid so you have to rush it out the door to mitigate your loss, reducing quality. Explain that you have quite a bit of experience with these projects and that you are confident about your estimate. Explain that if you had to estimate a fixed-bid project, you’d have to pad the estimate with some arbitrary percentage and they would pay that increased cost. Explain that with hourly billing, they only pay the real cost and they don’t have to pay for some imaginary padding.
Hourly rate can be good for everyone. Many clients understand that, because it’s so common in professional services. Try to explain it to them, but if you have to try too hard then just tell them they you’ll be happy to provide a fixed-bid price by simply adding 40% to the estimated hourly price (which is an honest way of bidding).
As for the minimum deposit, don’t listen to anyone telling you that there is a ‘best way’. Each client is different and billing terms vary widely. It depends on how much you trust the client and how desperate for cash you are. If you don’t trust them and you are cash-poor, take 50%. If you have lots of operating cash and they are reliable, give them Net 30. Or anything in between. Or milestone billing. Or progress billing, etc.
The basic concept is clients have control. Work expands to fill the budget “fixed” at a certain point.
And cost cutters will often bid low to win the fixed bid process, then employ a number of tricks to blow that budget out of the water.
Hourly bidding, in contrast, favors the educated client. Clarity, planning, and communication all bring the hourly price way down. The client has control over this. The unprepared, ad hoc, “throw it at the wall and let’s see what sticks” client …not so much a fan of the hourly process.
Finally, depending on how ‘granular’ you want to be, you can offer the client control by breaking out services…
X/hour – A service, B service, C service. (basic)
Y/hour – A, B, C plus D service, E service, F service
Z/hour – A-F plus G service, H service, and I service
This happens all the time, where services are stripped out of deliverables. The only difference is the client is never told what got stripped out to make budget.
Depending on what you want to do with this, services could be segment specific. So, for instance, a news or portal site bills out at higher hourly than brochureware.
How would you handle the type of client that says, “well how do I know you have billed me correctly and didn’t bs me?”
Or, the other type that says, “I pay for results, not hourly work. What if I don’t like your designs? Then I pay, but I still haven’t gotten what I paid for.”
Basically what I’m saying is, there are lots of clients that seem to not favor hourly billing because they feel that it’s voodoo magic and that you could exaggerate the work. For instance, you took 2 days to create a design. The client may just say, “that kind of work should have taken at most 3 hours”.
The issue occurs at the point of selling the client. If a client won’t agree, how can you get them to sign?
If your work is good and you have a lot of clients, they will trust you on your statments of your hours. You should be as honest as possible and only bill for hours you have worked. They will always want to see the work.
I recommend just using a time-tracking system and generate a nice little report every time you do a chunk of hours. Then send it off along with a project update.
If the client says “that kind of work should have taken at most 3 hours”, then I tell them they are free to work with another company if they don’t feel they are getting enough value. Usually these kinds of people have no experience in design or development, and I don’t take their estimates seriously unless they are based on a qualified source. Anyhow, the end-product quality I provide is always excellent and no one has left me at this point
PS - Don’t waste time with picky or stingy clients. They will only waste your time and drain all the energy out of your life with their unrealistic requests and devaluation of your services. I am speaking from firsthand experience!
Basically what I’m saying is, there are lots of clients that seem to not favor hourly billing because they feel that it’s voodoo magic and that you could exaggerate the work. For instance, you took 2 days to create a design. The client may just say, “that kind of work should have taken at most 3 hours”.
You “do” websites. You “do” logos. But there’s no process, no procedure, no methodology, and no user. End results just drop out of the computer based on the lack of information on most sites. For all the client knows there’s a Make Web Site button you click and “poof.”
Lets face it, the industry has set itself up to be replaced by a random website generator.
If only there were some world-wide communications medium for educating clients on the value you bring to the table. Truly, part of the answer (and problem) starts with a pretty but vacuous designer/developer website.
Most developers would sooner chew off a leg than link what they do to a Return On Investment figure. Although it does seem to be changing, most of web design is still stuck in the 1990s era of having sites to “have a site.” You really act as if the web hasn’t been around for a long time.
The “New Internet Smell” is gone. Deal with it.
Next, a properly managed client relationship would also be a way to avoid this. But that takes human interaction skill. And where that’s missing from the site design, don’t look for it to magically turn up during client wrangling.
Or, the other type that says, “I pay for results, not hourly work. What if I don’t like your designs? Then I pay, but I still haven’t gotten what I paid for.”
Unless it’s for the company intranet it’s not for the client. It’s for the client’s customers, or for users who have not become customers yet.
This is a non problem when you stop “hit and run” billable and start user centered web design with user testing as a forgone conclusion. Then when the client has a difference on a design, you can say “Fine, that’s what A/B split run testing is for. You run yours. I’ll run mine. And we’ll see who wins.” Seven times out of ten they’ll never risk being wrong.
Finally, there is the truly unscrupulous client preparing to run a scam. But I think the overall percentage of this is much lower once you remove the truly dismal skill in human relations on the other side of the table. Frankly, that’s probably the reason so few can even conceptualize a user test with “yuck” humans.
Hourly billing is a more professional way of working and works for more professional clients. Lot’s of clients scoff at it and insist on project-based pricing. I don’t like those clients.
All great info. Thank you guys for posting. I will be sure to bring all of these points up when I next brief the sales people about the hourly billing.
How do you specify in the contract regarding effort? I’ve seen it done where a table is created, which specifies each module’s effort in terms of time. Then the entire thing is summed and multiplied by the hourly rate. Add in some buffer and there’s the total price.
Then, at the bottom of the contract there is a clause saying that these are best-effort estimates, and that if it goes over, how much we’d charge.
I have a problem with charging a client more money on a fixed price project because I went over on time. It just doesn’t sit right with me and I would be really annoyed if someone did that to me.
However I really nail down the client with the scope of work in the contract. I nail it down to the point where I specify the number of fields for each form. When we get to the end and they ask for something else if I’m under in time I’ll throw it in.
And yes I’ll do hourly estimates for each part of the build and use that to calculate the total cost. I don’t put those numbers on the contract. Its mostly for me to give options on how to bring the price down if its more than they want to spend.
Estimating the time to build is key here the time required to go from an abstract concept to fully functional, live and paid for. It took me a really long time to figure this (I still underestimate from time to time). Don’t forget the time it takes you pull the clients idea out of their head and into a list of deliverables. Also there is all the time it takes to go over it once your finished, revisions etc.
It may take 8 hours for you to build but you’ll spend 15 hours easy from start to final payment.
For smaller builds and good clients I’ll bill hourly. This allows me to just code it and go. Much quicker turnaround on hourly bids.
AnnePlay, I don’t tend to bill “effort”, find yourself a time management application or something which will measure how much time you spend on each segment of the project (almost like a stopwatch) and hit it on when you start working, off when you’re not. You can therefore calculate the exact amount of time you spend working (and the effort exerted will depend on the task being undertaken). If your client isn’t satisfied with a breakdown of hours spent working on a project and how much time was allocated to each section, they aren’t worth the energy, their just going to milk you for all you’re worth (and undue stress will follow). For your client saying about you “making up time”, explain to them nicely that you can give them a breakdown of how long each task has taken you (perhaps update it live on a website!) and if they are unhappy at any stage they can feel free to pay you for the work undertaken and you’ll give them the work completed so they can take elsewhere (if they so wish). Can’t say fairer than that, as for paying for designs not accepted… surely you give them some rough mock-up’s before attempting a fully fledged design? Wireframes should be where everyone starts off, giving them some sketches for the layout so it removes redundant templates.
Goanna5, I would compare it to mobile phones… sounds funny but listen! People have two options with cellphones… Pay as you go (like hourly billing you only pay for what you need, as you need it) or contract (you pay a fixed amount no matter how much you use). If you have a large project which will take months to produce, a contract is a better option (because it avoids increased costs by doing a long term project at a fixed - usually high rate) the “contract” rate benefits the client as they wont have exceptionally high charges - post the up-front cost, and it benefits the designer as their going to get a large sum of money guaranteed. “Pay As You Go” or hourly billing works best for mid or small sized projects as they get the best value for money, and probably have a smaller budget (so they control your costs) and it benefits the designer as they are less likely to be “stiffed” in terms of low pay high complexity clients. Hope my comparison is common sense enough for your team!
You don’t need to add in any buffer, that’s one of the benefits. Estimate honestly, and tell your client that they can have a big impact on their end price by participating effectively, delivering content, approving quickly, and not changing their mind. They can also increase price by making sudden changes, etc. but they can do it if and when they want to.
But, don’t pad. Don’t buffer. Just disclose your rate, estimate as best you can, and do great work. The buffering is what the fixed-bid clients have to pay for (a premium for those who are willing to pay more in order to know the final price). There is no risk to you as long as you do a good job estimating actual time.
I have been working with fixed cost for a while and have to admit that it is not ideal. Occasionally it will work well though most of the time it will not unless you have a client who will just accept change requests.
Client’s really never know what they want. You can try to pull it out of their heads forever and write up long plans. Sign-offs are never final. While the requirements functional and non-functional may be met the client will still want changes.
Time and Materials is going to be my future preference as it allows flexibility for both me and the client.
How?
All requests can be addressed and paid for
There is no resentment in changes
Everything you do is valued by the customer (i.e. they realise that the little change in their mind is not that little)
You are less likely to abandon the project
Fix-cost encourages a relationship of scope creep
Each extra hour you work on a fix cost project it lowers you earnings per hour, how is this motivating for doing that little extra
Clients will always want something to be changed distracting you from moving onto the next project
Client hand-holding meetings will just keep going
Fix cost encourages you to cut corners to keep your profits a float
You may have not anticipated a dependency which causes you to have to go back and redo a lot of work (e.g. the client’s server is PHP 4 and you built a site in PHP 5)
How about the corporate clients that receive a approval for a project from management? Increasing pricing will kill the sale usually because they’d have to go through the whole “request management for additional money”, which likely will lead to reprimand by their managers.
Are corporate and government types the ones you pad your rates for so you can give a fix bid? Or is there some way to work around that and still bill hourly?
There is no such general policy, and even the term ‘corporate clients’ doesn’t really mean much. I am currently on working with a 45 million dollar project that is based on an statement of work that uses hourly rates that are limited by a not-to-exceed mechanism, but also a robust change order mechanism that allows the vendor to bill more if they can argue that the scope/requirements changed.
Is that hourly rate, or fixed-price billing? It’s both, or neither.
To the vendor, it’s hourly rate because they are billing actuals up to a certain level that they are comfortable with. To the client, it’s fixed-bid because they wont’ pay more than xxx as long as they don’t change anything. The vendor feels like their estimations were good, and that the client will make so many changes that their profit margin will improve over time.
I have seen public sector projects go out as strict-fixed bid projects, and the frequently have massive quality problems (but of course, not always). I’ve seen huge projects go out as strict hourly billing projects and fall apart, too.
There are lots of shades of grey in between.
You continue to want to codify things like management, negotiation of project pricing, etc. but I feel you will never succeed in doing that. Every project is different, and every ‘corporate client’ is different, too. Every project manager is different, and every decision maker is different.
I am a strong proponent of hourly rate billing as it’s generally good for both the vendor and the client. That said, we live in the real world not the theoretical one and most bigger deals have tons of concessions and special terms - nothing is ever simple
The biggest project I ever led was a fixed-bid project for a large government agency. We padded it like crazy, and the government agency (and the tax payer) overpaid as a result.
The second biggest project I ever led was a strict hourly rate project, with a bunch of mechanisms to control costs for the client. We didn’t pad that project at all, because there were 2 other vendors in a bidding war to win the work. That turned out to be the highest margin we ever saw and it worked out well for the client as we came in more than 10% under budget.
