Spread the risk

How should you pay a freelancer? By the hour, by the completed project, or by milestones?
The productive way I look at this question (avoiding religious debates) is by considering risk.
Some projects are extremely well understood. If a freelancer has an established offering (say, SEO) and a process that they go through, they know exactly what the project will cost them in time and resources, so they can take effectively all of the risk on themselves by taking payment on delivery of the completed project.
Some projects are more exploratory in nature. If the client is not sure what he or she wants, they need to take all the risk on themselves, paying a freelancer by the hour to explore the problem until they find a concrete project that the freelancer understands and is willing to accept some risk on.
Many projects fall into a grey area between those two extremes. The freelancer may be branching out into a new framework or methodology, so may be taking on more risk than usual. In that case, they may want to share some risk with the client by using intermediate milestones instead of completion as the condition for payment. The client should be aware in this case that they are taking on the risk of the freelancer not finishing the project, or not finishing it in a timely manner, due to unforeseen complications because of the new framework. This may lead to more aggressive negotiations on price, which the freelancer may have to accept.
The risk may come from the client in other cases. A client may think that they want a service, but may misunderstand the job to be done, which may lead to disagreement on what “done” means. The freelancer should be able to sense the confusion on the client’s part, which may lead to the freelancer pushing some risk back to the client.
In extreme cases, we are back to an exploratory type engagement, where the freelancer refuses to commit to a fixed fee or schedule until there is clarity in the client’s mind.
Alternatively, the freelancer may push for some milestone payment while doing the agreed-upon work. If the client disagrees that the project is complete, the freelancer will have at least partial payment in hand before going back and negotiating a new finish line.
A third option would be an increase in the freelancer’s asking price, as a compensation for the uncertainty of completing the project. Many times, the freelancer will combine this, perhaps asking for a normal full price as a milestone payment, and then adding additional milestones (possibly before, and) after the expected completion date, to cover for the uncertainty of the client.
Based on this framework of risk sharing, it is in the client’s best interest to:
- Know the exact scope of the project,
- Hire a freelancer who is a specialist in that scope, and
- Allow for milestone payments in exchange for a lower overall price, to give the freelancer the security of some early money.
In my opinion, the best way to scope out a project beforehand is to do some basic business analysis on your own. When you can make a specific request rather than a general cry for help, you are more likely to find the right freelancer, and get the best price on the engagement.
Freelancers, have I missed anything? Let me know in the comments.
