Last month, Chris and I gave a talk about pricing at WordCamp Vegas. Pricing is an interesting topic that rarely gets discussed so we seized the opportunity. I always have fun sharing business sessions like this with Chris and the crowd enjoyed our back and forth banter.
During the session, we detailed three different types of pricing structures that a developer can use:
- Flat Rate – The project has a fixed cost based on a set scope of work.
- Time and Materials – The project has is billed based on the amount of time in
- Risk / Reward – The developer defers some or all of the project cost in exchange for a participation in the profit later.
Let’s throw out the risk/reward scenario.
Neither Chris nor I will entertain that type of scenario. The crowd grimaced at the mere mention of this structure. Chris prefers to work with flat rate pricing while my preference is T&M pricing. Whatever structure you choose, it is important that the structure matches the needs of your project and of your client.
In a Time and Materials structure, I bill my clients for just that – my time and any materials I use to build the project.
There aren’t many materials used on a WordPress development project. Occasionally, there might be a software license fee that needs to be passed along to the client, but that’s about all I can think of. My clients set up their own hosting accounts and they maintain the billing relationship with the hosting provider.
So in reality, I am billing only for time. I invoice for the actual time that my teams incurs on the project. They spend an hour of time and I bill for an hour of time. It’s simple and clean.
Not every client is going to jump right in to a T&M structure. It requires a certain kind of relationship with a certain kind of client. At a glance, an hourly rate on it's own might raise concern for some clients. This is usually true of smaller projects.
I have always explained to my prospects that hourly rate by itself does not tell the whole story. My hourly rate may not be the lowest in town, but I know that my team is more efficient than most developers. So in the end, my clients actually spend less with me then with my competitors. However, that can be a tough sell for a new prospect.
Often my first engagement with a new client will be a flat rate structure. This way, they know exactly what the first engagement will cost. Time and materials billing starts typically after our first deliverable. We call this maintenance. I have enjoyed relationships with maintenance clients for over 10 years.
Estimates are usually expected with T&M billing. My clients want to know approximately what the project will cost to develop and this is a reasonable expectation. I am always happy to provide an estimate and I explain to my clients that it is just that – an estimate. The client will be billed at the end of the project for the actual hours incurred.
It is important to ask a new prospect about their billing expectations. Clients that have previously been billed as T&M typically know what to expect. Clients that are new to this industry may require some education as to the benefits of this billing structure. Have this conversation before starting any work!
Occasionally, a client will have questions about an invoice. Rates fluctuate and new competitors come into the market. I am always open to discussing competitive rates with my clients. However it usually comes back to the same result. Our shop is efficient and therefore our costs are highly competitive. Don’t be afraid to discuss an invoice with a client. This can lead to further sales.
Time and materials billing requires a working environment that is transparent to the client. They need to have access at all times to the hours that are being incurred. My clients have the ability to change direction at any time especially if they see that a feature request is taking longer than expected.
Most of my long-term clients are happy with a monthly hours report, but we still maintain a daily log in case they ever want to drill down further.
Some of the benefits of time and materials pricing include:
No proposals. I despise writing proposals! With a T&M structure, we can just start working and make adjustments as we go.
Agile. My shop utilizes an agile production process and this type of billing is a great fit.
Flexibility. We can shift gears whatever the client wants. We don’t have to stop to write a proposal or analyze scope. Instead, we just bill for the hours incurred.
Informal Scope. A formal scope document is not as critical with T&M billing as it is with flat rate.
Speed. When a client requests a change in scope, we don’t get bogged down waiting for an approval on a change order.
The shortcomings of time and materials billing include:
Profit Margins. I have experienced higher profit margins with flat rate billing. Time and materials billing has profit built into every hour, but I only get paid for the actual hours incurred. With flat rate, I get paid the same no matter how long (or better yet, how short) the project takes to complete. However, that can be a gamble.
Blank Check. Clients might view T&M billing as a never ending cost. That's can be a tough sell.
Project Completion. T&M projects might never end. This could pose a problem if you have other commitments that are being put on the back burner as a result.
Managing Expectations. In a T&M structure, a client may you your shop as an arm of their company and expect you to be at their beck and call. They may have unrealistic expectations about your response and expect to be treated as your only client.
Time and materials pricing is what works for most of my clients, but this doesn’t mean that it is the right fit for every situation. Discuss the different possible structures with your clients and find the best fit for both of you. It is ok to mix structures. Some projects may be a good fit for T&M and others may be better suited for flat rate. Further, different phases of the same project may require different structures.