The very real danger of quoting per project instead of per hour

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Every time the question of “should I charge by project or by the hour” comes up here at Millo, we always advocate for per-project pricing.

Why?

The short of it is this: when you charge by the project, you guarantee your income and even get “a bonus” for finishing a project early.

It seems like a no-brainer.

Sidenote: Once you finish, read how 4 freelancers built recurring revenue models that changed their business. You'll love it.

But a few weeks ago in the Millo Mastermind group on facebook, reader Andrea posted this:

Her post at the time of writing this article had over a dozen responses.

And while the real question here has to do with taxes, it got me thinking about our advice to always quote by the project scope and never by the number of hours you plan to work.

Every once in a while, you might find yourself stuck in a situation like Andrea’s. And it’s not an easy place to be in.

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So is quoting by project actually not the best way to go?

Not necessarily. I still recommend it.

But you should be aware of a very real danger that comes with quoting by project: sometimes you underbid and have to sacrifice what would be profits in order to deliver the project at the quoted price.

And it hurts.

Especially if your business is young and barely scraping by.

Here are a few ways to counteract the danger of underbidding:

With that background, let me suggest a few things you can do to eliminate (or at least minimize) the dangers of underbidding your projects–costing you time and profits.

Build contingencies into your agreement.

When writing up a contract, your goal is to build in as much flexibility as possible for yourself.

One easy way to do this would be to include a clause that explains what happens in the event of scope creep or unforeseen expenses. Does the client cover new costs? Do you? Or do you renegotiate the bill at that time. You have options here.

The point is to leave the agreement open to change when these kinds of things come up. That at least allows for a discussion when you find yourself in a situation like Andrea’s.

Set a minimum + hourly rate

Another way to avoid scope creep or unforeseen expenses is to set a minimum cost based on the planned scope with an option to add “by-the-hour” increases.

In this situation, your overall bid may be lower, but you’ll have a bit more cushion in case of major costs you didn’t expect.

This helps the client understand that your bid is your best guess, but may also be a minimum cost depending on what changes with scope, extra costs, etc.

Identify which costs you cover vs. which costs the client covers

Another way to avoid the same mess Andrea found herself in is to clarify which costs you’ll cover and which costs the client will cover.

Simply charge your client for the time and expertise you bring to the project and anything above and beyond that, they pay for.

If you’re designing a web site, for example, your client would pay you for the design, programming, etc. but would pay directly (even if it’s through you) for the hosting or domain registration.

Use other projects to balance it all out

Finally, remember that running a business is a long-term game. Sometimes you might have to eat into your profits in order to make a client happy.

Ask yourself: “If I absorb these costs, will it make my client happy and bring me more income in the long-run?”

And even if you’re not planning to work with this particular client again, remember: you have other projects and opportunities on which you can make up lost ground.

Business is more fluid than we sometimes believe.

Advice for Andrea?

If you have advice for someone like Andrea who suddenly finds themselves under-bid on a client order?

Leave your advice in the comments of this post or in the Millo Mastermind post.

 

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About Preston D Lee

Preston is an entrepreneur, writer, podcaster, and the founder of this blog. You can contact him via twitter at @prestondlee.

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Comments

  1. Great advice Preston. Building contingencies into your agreement is one of the most important lessons I’ve learned over the years. I create very detailed proposals and state clearly that anything not listed and/or unforeseen changes may result in additional costs. I always state that anything falling into this gap will be discussed in detail and approved by the client before moving forward so that my client doesn’t have any concern that they will get a much bigger bill than originally expected.
    I use a per project fee structure but do often include a per hour fee that applies above/beyond. I guess nothing is ‘fail-safe’ but this has saved me a lot of grief on more than one occasion.

  2. Don’t assume the worst from your client.

  3. For sure. Even though I have moved to a per project value-based pricing structure I still build in to my contracts that if a project exceeds the scope then I charge hourly beyond the scope. I do believe that their may be some other exceptions to the rule that you will have to judge for yourself on a project to project basis. For Example: I built out a WordPress Website for a client. They requested that I perform monthly maintenance on the site. Simple stuff like updating plugins, not content creation. So I charge hourly for that.

  4. SWATT Design says:

    Great article Preston. This is a lesson that I learned the hard way too. Now I have an additional page that I include with my estimates that details exactly what is included in the cost and what is extra (like extra page counts, additional rounds of amendments, stock photography purchases, etc).

    I also include an “Under/Over” clause. I make it very clear that the estimate is based on years of experience, but it is only an ESTIMATE. If the contract goes over the allotted time by a specified amount (usually 20%), then a percentage is added to the final invoice. If I over estimated the amount of time the job will take and I finish it really quickly, the same applies in reverse and the client gets a discount on their final invoice (makes for VERY happy clients). I also include a caveat in this section that if the time has gone over as a direct result of the client changing the brief mid project, they pay for the full amount of time that has gone over, not just a percentage. I find that it makes clients think twice before changing things on a whim. They tend to put a bit more thought into the change of direction and why they want it; which I find benefits the project as a whole.

  5. Sharon Pettis McElwee says:

    I’m a big fan of communication. I try to be very clear about what is NOT included in a project, and if a client asks for those things later, I let them know what the additional costs are. Since I deal with services, I usually don’t have to worry about materials unless its a printed project. But communication is the key. I would present it to the customer and see if they are willing to pay.

  6. alvalynlundgren says:

    I had one project a very long time ago where I realized that I had not allowed enough in my creative fee to cover the expense of the project. The expense back then involved separation films on a large poster. The cost of the films was more than I was received for my creative work. I would have taken a loss big time. But I decided to talk to the client, and discovered they were expecting to pay expenses in addition to the creative fee. It all worked out, and I learned at that moment to separate the two.

    So, Whether you price by the hour, the project or the value, expenses are separate from the creative fees. Every estimate and contract I write distinguishes between the two, so that the client understands up front that they will be billed for expenses and applicable sales taxes in addition to the creative fees. I also mark up expenses rather than passing the costs on directly. I obtain expense estimate prior to moving forward, so that the client approves the expenses beforehand. The best idea for Andrea and everyone is to separate fees from costs, and to obtain estimates for costs when possible and require a go-ahead from the client before proceeding.

  7. Paul Trivilino says:

    If Andrea’s business is registered with her local tax authority, she should check with them to see if she is required to pay sales tax for supplies she buys specifically for a client’s project. Some states allow businesses to purchase material and supplies tax free if the items are for a manufacturing purpose. Buying supplies to create a clients project would be considered a manufacturing purpose. The sales tax for the material and supplies would be paid by the client when they are billed for the completed project.

  8. Well written, Preston! I’ve been at this freelancing thing for 15 years and I could not agree more. There are other ways to protect yourself as well. 2 years I added a clause that allows either party to exit the project if the fit is not good – but there is a KILL FEE associated with it, of course. I have free downloads available of my proposal template here if your followers are interested: http://www.yourcreativejunkie.com/design-proposals-10-tips-protect-ass/. Thanks again for a very important post, keep up the good work!

    – Your Creative Junkie
    > v <

  9. Yes – I think per project is the way to go most of the time, but it can be difficult to do it per project if you have no idea how long something will take. This is usually because it’s something completely new to me and I don’t want to under-charge for the time I’ll put in on it.

  10. I always quote the prospect with a simple quote stating timeline and cost of the project. Once they agree to it, then I send over the agreement which has details of what is included etc.. My point is that you do not want to scare off the prospect by throwing everything but the kitchen sink at them before they commit. Try to sell your services and a solution to their problem and then explain your policies. Also I switch from project to hourly after the project is completed and there is need for additional work or updates.

  11. Hey Preston! Do you remember me from Fizzle? I have finally started my own website. At the moment it’s just in spanish but I’m going to get translated as well to serve both audiences as it was suggested to me.

    Anywas, I’m still following all your articles and this one is spot on. I also like to start with a per/project type of quote. Then, after I’ve shown my clients what I can do, if they have a lot more work to be done, I offer to get them a special hourly rate if they commit to a specific set of hours a week, for a specific set of months. This has worked out great for me as it helps me retain my clients and get some recurring revenue.

    Oh hey, changing the subject for a bit. There’s a banner in your sidebar that still says “Design Blender”. Your new subscribers could get confused 😉

    Cheers man!