Fixed-Bid projects are replacing T&M and they are hurting your cash flow
Are you just breaking even (or losing money) on Time & Materials or Fixed Bid projects? It may be time to consider a hybrid option.
Traditionally, professionals (web designers, IT consultants, or accountants) charge customers based on two leading mindsets:
- Time & Materials: charging the customer a $/hour for services.
- Fixed-Bid: charging a set amount for making something and delivering it (website, consulting framework, or software implementation & training).
But are those two options really working? To improve upon these models, I suggest a hybrid mindset called Fixed with Time Profit Sharing.
Fixed with time profit sharing.
In fixed with time profit sharing —you will estimate the project’s budget and set the terms with what normally would be called fixed bid. The difference is that when you come under that budget, you share the difference between actually (billable) costs and the true effort.
You’ll find that you can increase the consistency of revenue (profitability) because you low balling / high balling is averaged out.
When a project comes under budget, both sides get to share in the excitement and cost savings, increasing long-term customer loyalty.
Give an estimate of the time and hourly for each employee — this is your target budget. Make sure you are sending realistic estimates with project quoting software.
How you invoice the customer depends on if the final work is under or over the estimate.
Final work is under the estimate: Great, you and the customer split the savings.
- Your savings = (Target Budget — Time & Materials to complete)* % share
Final work is over the estimate: We can charge an unlimited amount, charge with a cap, or don’t charge.
- Overage charge = Time & Materials
- Overage charge = Time & Materials (capped at 10% dollar overage)
- Overage charge = $0 (traditional fixed bid)
In your project management software
Let’s see how to set up a new website project, log time and the invoice under the hybrid model in a project management software called AffinityLive.
How to get more revenue? Deliver a project on time and (or even under) budget. Of course, there may be an increase in revenue for going over budget — but your customer probably isn’t keeping you around for much longer if you continue overcharging.
The other models.
Neither Time & Materials nor Fixed Bid projects are likely to go away soon, so let’s take a look at how to increase revenue out of each and how to set them up in a Project Management software like AffinityLive.
Time & Materials
How to get more revenue? Increase your rate (by becoming more skilled or more well-known) or increase the number of hours you work ( by working more hours or tracking your hours better).
Time and materials are the old standards. It’s good for larger, more complex projects with many unknowns because it allows for the true work effort to pass to the customer — sounds fair, right?
Well, we are finding that customers can be wary to sign an unknown with just a rate and no hours attached to it. Even if the budget is laid out, what terms are limiting the scope? It can make for lazy project planning, budgeting, and scoping.
How to get more revenue? Raise the overall project rate. Your customers are smart and are likely backtracking your hourly rate.
Smaller agencies are gravitating to the fixed-bid module as it is easier to set up / bill — especially if you can’t/don’t track time on the overall project. Also, the productization of service (selling bundles of services and product sets rather than pure skill promises) is creating more fixed-bid projects.
Because fixed-bid projects are a rough estimate of scope and time, it’s often a bet on the firm’s side: how much effort +/- customer’s price sensitivity. You are probably losing out with change orders, feature creep, client communication, and work that slips through for free.
I don’t like this model because I hate gambling in business. It breeds uncertainty, cost-cutting, and decreased quality. It hurts the short and long-run profitability of your business.
While service can be productized, I ask for a consistency productization (in service expectations and delivery), and not a set price productization which hurts both the firm and the customer.
If you would like to explore the hybrid model of Fixed with Time Profit Sharing or want to start tracking your project time, try AffinityLive.