Fixed Price or Hourly?

Pros and cons

Every agency has its own preferences regarding work methodology and payment method. There are two typical options: by hourly rate or fixed budget. Both methods have its own advantages and disadvantages. All these nuances affect the process and each must be approached differently. We often try to be very flexible with our clients and often our choice is made based on project conditions and client’s preferences.

In this post, I would like to explain how to make the right choice and of course list nuances to consider and discuss with your client in advance.

Fixed price

In our opinion, this is the most common method particularly for projects with a low budget (less than $10,000). This method seems optimal from the client’s perspective, as he knows his bottom line. Plus client clearly understands what exactly he will get in result. However, this approach has some significant drawbacks:

1. Project start can be greatly tightened because of writing all necessary specifications. It must be very detailed so that 3d party can accurately estimate labor costs. On the other hand, it can significantly save the project from the crudity or guessing on later stages.
2. This method assumes that requirements will not be changed during the development phase. This is a significant disadvantage since in most cases the client has new ideas while start “playing” with the prototype e.g. poor usability, feedback from focus groups etc.
3. It may lead to the conflict and strain relations. Even if the client has been informed, he is often asking for changes referring to its meanness and it happens again and again.
4. The team is limited in creativity to the proposed scope and budget.
5. In case of constant pressure and change requests, the team stops thinking about the project and more and more think about the changes in the timing and budget.
6. In our view, this approach requires too much micromanagement and thus poor flexibility.
7. In addition, the client does not own the code/rights before full payment made which may also be important (do code reviews himself, present a prototype on its own environment etc.)
8. After all, working with this approach is more expensive, because the vendor is trying to cover potential risks with extra hours.

Hourly billing

This approach is most likely used by clients with certain experience. Moreover, in our opinion, quite a large percentage of clients are moving to this method after trying to work with a fixed budget. In this case, the client is billed for the actual number of hours spent. If there were additional requests — you pay more, something was done quicker — you pay less.

We do very detailed reports in Everhour before issuing an invoice.

Pros:

1. The team works closely with the client and always discuss any possible scenarios to achieve the optimal result. There is a room for creativity, less formality, and bureaucracy.
2. The client controls the budget, may add new features, simplify existing requirements or completely move them to another phase to meet the deadline.

Cons:

1. The budget for the project is more flexible. Of course, each task or release is estimated in advance, but the client must understand that the project may require additional infusions of funds.

We obviously prefer the hourly based method, as from our point of view in such a case all remain in positive territory. As I said, there is no assessment without an error. In case of a fixed budget, someone loses. If the project has been underestimated — the vendor loses money, if it takes less time than estimated — the client is overcharged.

The best project that we worked on was rewritten many times, refactored, features were added and removed constantly but ultimately result approved all expectations and the client has compensated all his investments which would never happen in a project with a fixed budget.

To date, most of our projects — hourly assignments.

Summing up, I would like to state the following fact. Clients love the flexibility, but often they feel safer starting the first project with a fixed price.