Toolkit for Consultants: Contract Types
By C. Thomas Tyler
So, your marketing prowess has won you a client’s attention, and they’re sold on your value proposition. One of the next steps is to work through the mechanics of how business will be done – time and materials, fixed-price, support agreements, etc. This isn’t a “pick one” decision. In fact it probably makes sense to check the “All of the above” box! Supporting multiple business models can expand your reach by allowing you to handle clients in different situations. It’s also easier to have multiple concurrent clients without working yourself to death if you support several ways of doing business.
Time & Materials – Hourly Rate
Many contractors start out doing only the default, hourly-rate, time & materials contracts. This is a tried and true method of earning money, and tends to generate a lot of revenue. It is certainly a viable approach for situations where the client isn’t exactly sure what they want. But there are common pitfalls to be avoided:
- Monopoly on You: Try not to let any one client monopolize your time. For example, try to avoid working more than an average of about 30 hours/week for any one client. If you allow your work life to be overly focused on one client for too long a time, it’s easy to lose situational awareness with respect to the growth of your business.
- Backwards Incentive: The better you get at doing things faster, the more work you have to do to earn the same money. Exceptionally high productivity in the performance of a contract rewards you with decreased revenue!
- Loss of Respect/Possessiveness: Because of the close association between time and money on hourly rate contracts, they tend to encourage a sense of ownership. When you’re billing, you’re viewed as being on the client’s time – they own you for that time. In some situations, a sense of possessiveness ensues; for example, clients might be concerned if you spend too much time working for other clients. Hourly rate contractors are often thought of as “an extra pair of hands”, perhaps even a very capable pair of hands, but not as leading experts in the field. (Note: If your hourly rate gets high enough, all of these negative factors diminish considerably).
- No Charge for Startup Value: If you have established tools, techniques, processes, or utilities to make yourself better and faster at what you do, it’s hard to charge fairly for that when starting with a new client.
Fixed-Price Contracts
The fixed-price model is not for the faint of heart. Good estimation, project management, and project planning skills are required. However, because it’s hard, it has certain intrinsic value – the fact that you can support fixed bid conveys to clients that you have confidence in your ability to deliver solutions on time and on budget.
The “Backwards Incentive” problem is gone. More importantly, the fixed-price models allow you to run multiple clients concurrently. When you’re doing your estimation, you can account for the fact that you’ll only be working for a given client say 15% of the time or 50% of the time. So long as you can deliver on the agreed upon schedule, they’ll be happy and won’t be concerned that you’re building business with other clients simultaneously. Any perception of owning you or your time is gone – they’re paying for your solution. Clients get a predictable budget for the project.
In many cases fixed-price contracts are calculated using an expected number of hours, and simply multiplying your hourly rate. Be sure to use a higher an hourly rate than you would use for hourly contracts, to account for the transfer of risk from the client to yourself.
A common pitfall to avoid is doing weeks of analysis work for free in an attempt to get enough information to put together a solid enough estimate to avoid losing your shirt on the deal. An alternative is to start large chunks of work with a small Assessment and Discovery contract, generally for a small amount of time and money, say something on the order of one-two weeks of calendar time, typically costing $10,000 or less. Deliverables typically include a requirements document and projects plan, which can be used to calculate your “Phase 2” and beyond efforts with sufficient clarity to avoid wildly inaccurate guesses.
Be sure to benefit from your own experience when putting together estimates for fixed-price contracts. (This can be especially difficult for techies!) Rather than thinking along the lines of “I think it would take, oh, about this long to get this or that done,” try instead to think more along the lines of “last time I tried to do something of similar scale and complexity, it took, oh, about this long.” The latter technique uses experience-based estimates, and tends to produce more realistic (generally longer) timeframes. That’s because it accounts for things that are hard to think of when you’re wearing your optimistic “Developer” hat. For example, it accounts for the fact that you generally don’t have 40 extremely highly productive, fully caffeinated, distraction-free hours every week. If the customers think the timeframe seems long, be sure to convey to them that you’re using “experience-based estimates” rather than complete SWAGS (simple wild-assed guesses).
On fixed-price contracts, clients always tend to want a little more for free. They’ll want to squeeze in an extra feature here, a bug fix there. Scope creep may ensue after the Statement of Work is signed. Good negotiation skills and business sense are important here. You may want to build some “freebie” time into the budget for your project, in effect planning to give away some freebie features without having to go back to the drawing board with contract negotiations.
If you’re doing something new, or if you’re learning some new skills or technologies, there is inherent schedule and cost risk. If there is no sense of “been there, done that”, the situation may be better handled on a time & materials basis.
Support Agreements
After you’ve wrapped up a project for a client, you may find yourself in a situation where the client wants to ensure that you’re available for a period of time to support whatever it is you just delivered, but they don’t have any immediate work for you. This is an opportunity to sell them a support agreement. You offer to provide continuity of support and assured availability, typically with guaranteed response times for off site email and telephone support.
Support agreements provide you with a predictable long-term revenue stream, and allow you to maintain constant contact with multiple clients. They provide your clients with a low-cost way to ensure they can call you when they want you, and not have to be concerned that you’ll tied up 100% on some other contract.
Support agreements often use a retainer pricing model. Clients play a fixed monthly fee for some set number of hours, say 20 hours per calendar month. They pay for those hours regardless of whether any requests are made. The billing rate used to calculate the monthly fee can be discounted from the usual hourly rate, with bigger discounts applied for longer commitments. If your clients require extremely fast turn around or off hours support, a premium service fee may apply.
If more than the set number of hours is needed, the usual billing rate applies. So for example, if support requests required 26 hours in a particular month, you would bill for 6 hours at the usual hourly rate, in addition to the monthly fee (using the discounted rate). Support agreements are typically for a predetermined amount of time, such as 6 months or 1 year. To maintain a support agreement, you have a responsibility to keep your cell phone battery charged, keep new batteries in your pager, pay your phone bill, etc. ;)
By
C. Thomas Tyler
Chief Technology Officer
The Go To Group, Inc.
Former President, ICCA Greater Boston Chapter
