I've been giving some thought recently to the way we charge consulting fees. It seems fairly common in my area of the US to charge by the hour (or by the day). But I've been thinking of the pros and cons of quoting by the project instead of by the hour. Instead of giving a quote of x hours at y dollars per hour, I would quote xx dollars for the project. Let me list some of my thoughts on that:
- Per hour billing is self-limiting. Your growth is limited to a combination of the amount of hours in a week and your fee (which is limited by the local market). Without hiring someone (or subcontracting) you can't increase your billable hours past what is physically possible in a week.
- Per hour billing doesn't give a percieved value of the results of the project (which is what the client is interested in), but only the value of your time (which the client really doesn't care about). A client's percieved result value may be six figures, but that may take a years worth of hours to meet when in reality it's only a 3 month project.
Let me share an example to compare.
Scenario 1 - Per-Diem Billing
Project is quoted at 100 hours at the rate of $75/hr. This comes to $7500
Scenario 2 - Per-project billing
The process that your project is intended to replace (or enhance, improve, whatever) is estimate to cost $75,000 a year in time and material to the client and is a place where error can creep in which raises that cost. The client knows the process needs changed and agrees with your proposed changes. A successful project will allow the client to reduce the cost of this process to $35,000 a year and minimize a chance for human error. This is a savings of $40,000 a year just in the cost to the business. Given the market in your area and your relationship with the client, you could potential set your quote to be anywhere from $10,000 to $40,000 or so and this will pay for itself in the first year in savings to the client.
This example may be convoluted (and admittedly not completely thought through and thorough), but unless I'm missing something, I see the potential there to increase the fees we charge and still have a client that is happy.
I need to think through this further before any changes are made in the way I set my fees (I currently have been billing per hour as do most of my associates), but does this seem reasonable to anyone? Are there any out there that can make valid arguments contrary to what I've stated. I'm interested in hearing both sides.