Whether your consulting business is just one person or thousands of people, you sell two things….a skillset and time. The ‘skillset’ makes sense; you might be an architect, a web designer, or a marketing professional, but you have a unique skillset that is in demand and people are willing to pay for it. But what about time? Why is this important? Time is where most consulting companies fail miserably, or prosper triumphantly.
Fixed vs Hourly vs Upset Fees
Before we dive into the importance of the time variable, let’s do a quick primer on how consultants contract to their clients.
- Fixed Fee: Most clients want to know the total fee (the bill) they will be charged before you start the project. This is called the fixed fee. The fixed fee is the amount you will charge them, irrespective of the amount of hours you put in. For example, if you tell the client your bill will be $10,000, then, regardless of the hours you put in, 100 or 1000 hours, you can only bill them $10k. When you shop for a widget or eat at a restaurant, you are paying a fixed fee. You know the total before you buy it. Client’s like the security of knowing what the bill will be before you start the work.
- Hourly Fee: In some cases, consultants work on an hourly fee basis. In this relatively rare scenario, the client agrees to your hourly rate but the number of hours you work is generally unknown. If your rate is $100/hr and you work for 10 hours, you will charge the client $1,000. As a rule, clients do not like to give consultants a ‘blank cheque’. They want to know how long and what the total bill will be. But, there are cases when the consultant or the client doesn’t know how long the work will take. If I’m a planning consultant trying to secure government approval for a private developer, it’s very difficult to estimate how long it may take to secure the approvals, so it is very difficult to provide a fixed fee. A consultant could loose big if they entered into a fixed fee contract for a job that has an unknown timeline. If there unknowns and your client will agree to an hourly fee, the consultant will (usually) never loose money on an hourly project. But these type of contracts are usually rare.
- Upset Fee: Rarer still is the Upset Fee; where the consultant sets a maximum limit to be billed, but, if it takes less hours than estimated (at an agreed hourly rate), the consultant only bills for the hours spent (an amount less than the maximum limit). The Upset Fee scenario is usually a worst case for the consultant; they can only bill to a maximum amount so if they go over the number of hours, they eat the loss. But if they are efficient with their time and come in under-budget, the client benefits from a lower bill. Some client’s like to work on an upset basis, and so long as the estimated hours aren’t exceeded (i.e. there are no unknown time factors), it can work for a consultant. But beware, it does come with risk.
For all three fee billing types, it’s important to list your assumptions when providing the client a fee proposal. Without setting-out the conditions, the client may think you are providing much more work than you think needs to be provided. This can create problems getting paid, or worse, you may end up in a legal quagmire. For instance, if an architect is providing a fixed fee for a home design, she usually provides fees for the design of the house, not for other out-buildings and certainly not to build the home. Be 100% clear about what services are being provided with a list of assumptions or conditions at the end of your proposal. As you get more experience, you will learn new assumptions that should be added to your proposal to protect yourself (and your client) from unknowns.
GroupThinq Fee Types
GroupThinq allows you to select the Fee Type when you create a new project. This is a very important variable. Fixed fees have a maximum invoice limit so no matter how many hours your staff put in to the project, you can only bill the client a fixed amount. If your staff don’t understand that the project is fixed, they could work indefinitely on the project causing you to loose big. If you set the project up as hourly, then every hour you and your staff spend can technically be recouped and charged back to a client. As I mentioned, hourly projects are usually rare in consulting.
The project fee types are listed in everyone’s timesheets to the right of the timesheet grid. Hourly projects show up as green hourly boxes. Fixed and Upset Fees show up as a percent complete. The % complete (or progress) is a ratio of the amount of time spent to the amount of time remaining. Go ahead, click on the progress bar to get a detailed breakdown of everyone’s hours, days and dollars spent on each phase of the project. This data is freely available to everyone, so they can see how much time has been spent, and how much time is remaining on a project,
If you could pick one lesson to teach your staff about the business of consulting, it should be the difference between fixed fee projects and hourly fee projects. The chances are high that many don’t know the difference, and hence, they probably don’t know that every hour worked over-budget on a fixed fee project, is a loss to the company. Everyone in your company, from summer student to senior project managers, should know this difference on day 1. Put it in your company handbook or even in your letter of offer when they start. It’s never too early to start learning the business of consulting.
In Part 2, we will look at the 2 variables you need to track to ensure profitability when growing your consulting business.
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