I’ll never forget the advice my delivery manager gave me 10 years ago when I worked on my first pursuit:
“Either sell your time, or sell the deliverable. Never, ever promise both.”
That turned out to be sage advice. If I had to write only one post on consulting contracts, this would be it.
There are really only two kinds of consulting contracts you should write for your clients:
- Time and Materials (T&M) contracts – Hey rent me and my special talents for a few hours/days/weeks!
- Fixed Price Contracts – For $500, I promise to make your headache go away!
I’m leaving out retainers for now. Those are a different animal and are only used by smart people like lawyers, publicists and people who write eBooks.
The real distinction between T&M and fixed-fee contracts lies in who owns the risk.
In a T&M arrangement, the client prioritizes the work (what gets done first and when) and is responsible for supplying any additional resources. They own the risk.
For fixed-fee contracts, the consultant (or firm) owns the risk. They are responsible for delivering a defined solution/deliverable/result by an agreed deadline and are responsible for filling any gaps in people or resources.
Here’s a scenario:
Let’s assume today is July 1, and your client needs to deliver an HR Strategy to the executive committee by July 31st (i.e., four weeks from now).
They’d like to hire your consulting firm and asked for a proposal. During your due diligence, you probably will come to one of three conclusions:
- The scope is well defined, the work is in your wheelhouse and the risk is manageable. You can deliver the strategy for a fixed-fee of $25,000 dollars. If you make the deadline you get paid, If you don’t, you won’t.
- The deadline is tight, the scope isn’t entirely clear and there seems to be too many decision makers involved. You can definitely help, but aren’t sure you can manage the risk. You can offer your services at either a daily or hourly rate for the next four weeks (T&M) to assist their team in crafting the strategy, but you won’t be financially responsible for the outcome.
- The project is a train wreck waiting to happen, and you’d rather pass than sully your reputation.
These are all fine options, but let’s assume you decided to go fixed-fee and sent the proposal.
Here’s where a lot of people trip up. The client asks you how you arrived at the number and you answer: “I multiplied my hourly rate times 160 hours”.
You have officially opened the rabbit hole.
Your customer may haggle you down by questioning every hour estimated or, leverage your time estimate to shop other vendors.
What about the delivery?
If you finished in 120 hours, they may ask you to cut your fee.
How would you respond?
If you worked overtime to make the date, you couldn’t possibly ask for more money. That’s for sure.
Things get muddy real quick, and what gets lost in all of these what-ifs is:
When effort gets mixed with results, the value of those results fade in the buyer’s eyes.
If the client would like you to provide a tangible result, they should be paying a fixed fee (value based or otherwise), let you take the risk, and let you manage your process.
If they want to manage the process, they can take the risk and pay you T&M.
It’s that simple.
- Do not agree to a deliverable (see: result) based on specified amount of your time (see: effort)
- Do not write a T&M contract with an implied agreement that something will be created, delivered, finished, etc.
- Do not write a fixed price contract that specifies how many work hours will be spent.
Rule of thumb: when the solution is defined, the scope is set, and you can manage risk then you can consider fixed-fee as a viable option, but when the scope, solution, and resources required are all in flux you are better off sticking to T&M.
Know the difference between a deadline and an end date.
What you deliver has value as does your time. Rarely shall the two ever meet…exactly.
Consultants write these proposals because tough clients twist their arms, and they feel desperate to win the business.
But, these arrangements rarely work out, and often leave both parties frustrated in the end.
Don’t get intimidated, just do the right thing.
For you and your client.