Clients Should Pay for Value Created, Not Time Spent
Most consultants bill clients based on hours worked. Most clients expect to pay consultants for hours worked. This time and materials fee model is the oldest and most accepted consulting fee model. It's also broken.
The time and materials fee model does a poor job -
- Aligning value the consultant creates for the client
- The consultant's compensation
Using this model, the more time the consultant works, the more the consultant gets paid. There’s no guarantee the time worked is also creating value for the client.
Trying to map the value created to hours worked is a a subjective and time consuming exercise. Clients and consultants find this exercise to be unsatisfying and a waste of time.
The time and materials model also makes operating in a global economy difficult. Consultants may charge different fees in different parts of the world. An hourly rate that works in New York City or San Francisco may not work in London, for example.
Aligning Client Value with Consulting Fees
That’s why I prefer a value based approach to setting my project management consulting fees. I believe this approach is the most effective way to -
- Align client value I create with my fees
My fees are set. I’m there to make the project successful. This is the value I provide to the client. The client knows what they’re paying for this value. I know what the client is paying me for it.
I’m rewarded for working more efficiently and effectively, not penalized for it. My effective hourly rate goes up the more efficiently I work. My effective hourly rate goes down as my efficiency decreases. The client benefits from improved project performance the more efficiently I can work.
- Normalize my fees across different geographies
I charge clients a flat percentage of the total project budget. A percentage calculates the same way across any currency and any geography.
The client pays what they’d expect to pay based on their geography. I choose the projects I work on based on the calculated fees. I also consider how efficiently I can deliver the project.
This helps align my experience and expertise with clients who need it. Neither the client or I have to deal with fluctuating exchange rates. I don’t have to manage a complicated set of rates.
Project Management as an Insurance Policy
A strong project manager provides an insurance policy on a project. A strong project manager delivers a project on spec, on time and within budget.
Doing this prevents the client from incurring extra -
- Direct costs, e.g. budget overages
- Indirect costs, e.g. lost revenue due to missed release dates
20%-25% of Total Project Fees
I've found a rate of 20%-25% of the total weekly project fees works well for the client and me.
The 20-25% range also works well if there is a third party agency hires me to work with their client.
Why Flat Rate Billing Works for the Client
This flat fee allows the client to -
- Accurately predict their project management costs
The client builds the 20%-25% project management fee into their budget. My fee is calculated based on the actual project budget.
- Align the client’s success with mine
The 20-25% project management fee gets calculated against the estimated budget. It’s applied to scope changes the client requests.
It’s not applied to budget overages. This aligns the client’s success with mine. It levels the risk between us too.
There are instances where budget overages may be out of my control. The client and I have a discussion when this happens. We agree to an arrangement that works for both of us.
Why Flat Rate Billing Works for Me, the Project Manager
Not all project managers can operate under this model and make a profit. This model works for experienced project managers. It works better when you add the use of effective project management systems into the mix.
Experienced project managers know how to work effectively and efficiently. We know what systems to put in place and how to use them.
Project managers don't have to worry about tracking time under this model. We don't have to spend unnecessary overhead reviewing line items on invoices with clients. We're rewarded for working effectively and efficiently, not punished for it.
Give it a Shot, It's Worth a Try
The popularity of value based fee structures is gaining traction. Clients who try value based billing like it. It clicks. They get it. They stick with it.
Many clients still prefer the time and materials model. It’s the comfortable model. It’s the model they're used to using.
Ask you client to try a value based fee structure. Show them how it aligns both of your interests.
Show your customer it works for them once. They’ll become a believer. That’s when you both win.