But Won’t You Bilk Me If I Pay By The Hour?
After a long search, you’ve finally found the perfect web designer. Her examples are beautiful, she has fantastic references, and her process looks great. But she bills by the hour, and that has you nervous. What if she takes way longer to design your site than she estimates? What happens if she gives you initial comps and you hate all of them – why should you have to pay her more money when she didn’t make you happy in the first place?
Should you insist on a fixed project price?
Agencies and their clients each tend to have pretty strong feelings about the proper way to pay for professional services. Some agencies charge by the hour, others by the project, and each has its pros and cons.
Charging Fixed Price
Why should you want your agency to charge you a fixed project price?
- Peace of mind – You can set a budget and you will know exactly what you will be paying (but only assuming nothing changes over the course of the project.)
- Reduced Risk – You’re protected in case the work takes the agency longer than anticipated – after all, if they underestimated the work, why should you have to pay the price? On the other hand, usually this happens because the agency had incomplete information and often the contract ends up renegotiated anyway.
- Incentives – Your agency has strong incentives to get the work done quicker. After all, if they can somehow finish early, they stand to make a windfall (the same fees, but in less time.) Also, a fixed price removes a potential conflict of interest where the agency actually makes more money if the project takes longer than expected.
The Downside of Fixed Price
On the other hand, there are some very good reasons why a fixed project price may not be in your best interest and you may be better off paying hourly.
- Wrong incentives and compromised quality – A fixed price gives the agency a financial incentive to do the least amount of work that gets a “good enough” result. You may disagree with the agency about what that means. This can particularly become a problem when a project starts to run over budget. You may be protected financially, but it’s very easy for hidden quality defects to be introduced when your agency is rushing to get the job done. It’s usually not in your best interest for your agency to be working for free.
- Risk of overpaying – The more complex the project, the more likely you are getting bilked by paying a fixed price. For example, if you hire a web development company to build a complex e-commerce site, there is no way they can know enough of the project details upfront when they need to give an estimate. So, they pad the hell out of it. They have to if they are taking on 100% of the risk that the estimate is too low. If you paid hourly, you may have only paid half the price if the estimate was accurate.
- Inefficient – When a contract budget is fixed, anything that the agency deems as “out of scope” becomes a brand new contract negotiation. You may find you spend as much time negotiating every little “change” as you do working on the project.
- Unending – It’s actually more difficult to get a fixed price project completed. There is always the temptation to tweak endlessly to make it better. The tweaks may technically be within the contracted project scope (e.g. the functionality may not really change, but can’t we just make the corners slightly more rounded? After all, the contract didn’t say we wouldn’t have rounded corners) but since you’re not paying extra, it’s very hard to stop and make the decision that the project is good enough at this point to launch.
- Inflexible – One way many agencies try to get around the “unending” issue is to try to define the scope of work in as much detail as possible up front. This results in a much longer discovery phase and an inability to easily make scope changes during the project as new things are learned. Seth Gottleib, founder of Content Here, thinks fixed bid projects are “a marriage made in Vegas“. Seth writes, “Any successful partnership depends on both parties working collaboratively and creatively to solve problems as they come up. A fixed bid contract prevents this cooperation by making the relationship inflexible.”
The Problem is Uncertainty
With either pricing model, the underlying problem is the inherent uncertainty of what a project should cost. Research has clearly shown that for any creative enterprise there is no way to really know up front how long it will take to complete. The more complex the project, the more possible outcomes there are. During any significant creative project timeline, new ideas will be hatched, stuff will be learned, and unexpected business requirements will come up. A project that cannot change with these new circumstances is one that will be sub-par at best, and will fail at worst. As Construx writes in “The Cone of Uncertainty”:
“Early in a project, specific details of the nature of the software to be built, details of specific requirements, details of the solution, project plan, staffing, and other project variables are unclear…. One question that managers and customers ask is, ‘If I give you another week to work on your estimate, can you refine it so that it contains less uncertainty?’ That’s a reasonable request, but unfortunately it’s not possible to deliver on that request.”
In such projects, a huge part of the work is designing the system, and design, by definition is uncertain. How long will it take you to compose a song? Write a book? Complete a painting?
When Beethoven sat down to begin composing his 9th Symphony could he have given a reasonable estimate for how long it would take? If he was especially inspired, maybe he could have popped it out in a week. Or maybe it would take him a year.
Now perhaps your project is not a Beethoven Symphony. Nonetheless, it’s still a creative endeavor (at least it certainly SHOULD be), not a by-rote, paint-by-numbers exercise.
Fixed price projects are still based on an estimate, with a lot of padding, of how many hours the project will take multiplied by the agency’s hourly rate. By paying by the hour, you are at least acknowledging this uncertainty.
So overall we believe that the hourly arrangement is superior to a fixed price. The question is, is there a better way?
In part 3 of this series we will explain a hybrid path we have used with some clients that we think provides some distinct advantages to either approach.
First, however, we will discuss some more about the difficulties of creative project estimation a way to structure hourly contracts to reduce risk and best align incentives.