Yesterday I discussed aligning incentives between you and your clients when in the business to business service industry. In particular I talked about the effect of pricing models, since money is the most important controllable incentive. Today I’m going to go into more detail about the incentives of project based pricing.
Project Based Pricing
Project based, or fixed bid, pricing is the second most common way of billing I’ve seen. The way it works is that a company approaches you and asks for your estimate of how long a project will take. You give them an estimate and that is how much they pay you, regardless of the amount of time you spend on it.
Project based pricing is really good for the client because they know how much they will be spending up front. They don’t have to worry about their costs ballooning and what they will do in that situation. This form of billing also creates tension between you and the client because the client wants you to do as much as they can get out of you and you want to do as little so that you can have a higher effective bill rate – if a project that you estimate at 40 hours at $100 an hour only takes 20 hours then your effective bill rate is $200 an hour. Yay for you!
In my experience, consultants hate project based billing. It scares them because it is very difficult to get the estimate right and the $200 effective bill rate situation mentioned above is rare.
I really like project based billing, partially because I tend to go in the opposite direction as everyone else, and partially because I’m good at what I do and quicker than average.