October 28, 2004

9:33 AM

I am in Wisconsin and forming an agreement with a company interested in oursourcing some web design. I'd like to charge a flat fee per project. What is a fair percentage of the profit they make for me to ask for? 40%?
posted by anonymous to (7 comments total)

What is it going to be a flat fee (an exact dollar amount) or a percentage of profit? The problem with charging a percentage of profit is that profits can be manipulated, just ask anyone in Hollywood.
posted by caddis at 9:44 AM on October 28, 2004

Hoo boy.

Yeah. Don't do this. It's an incredibly bad idea.

You'll have no way to verify what their profit was, to tell whether you're getting your fair percentage.

More importantly, you'll also have no way to control the workload, and they'll have no incentive to keep your hours per project reasonable compared to the flat fee. Client wants another revision? No problem, we're paying anonymous the same amount either way; he won't mind the extra 40 hours at no pay. Client wants a ten thousand dollar website for one thousand dollars? What do we care, we're not the ones doing the work; we'll collect our percentage and let anonymous figure out how to get the job done.

Those are worst-case, and I'm sure the company you're dealing with wouldn't plan on that sort of behavior -- but an arrangement like this is just asking for trouble.
posted by ook at 11:53 AM on October 28, 2004

Yeah, let me chime in on this--I'm involved in this sort of relationship a lot, as both a supplier and a client of services in this space, and charging either "a flat fee" (if that means what I think it means) or a percentage of the project budget/profit are both bad ideas.

The key thing to remember is that the company you're working with is a _client_, and you really need to introduce all the redundancies and safeguards into that relationship that you would any other.

That includes:


1) Making sure that, for any given project, you have the best possible idea upfront of what it's going to cost you in time and expenses, and what a fair price for that service will be.

Just in case you're still figuring this stuff out, the difference between what you charge a client, and what you effectively spend to get the work done is called the "margin" on that project. In general, for professional interactive services like designing, coding, production, etc., anything above 20-30% is doing pretty well. (I've run departments and accounts at very big agencies and very small agencies, and usually the margin goal was 15-20% in tough times, and higher in good times.)

Also, make sure you don't undervalue your own work. When you calculate your margin on a project, take a fair estimate of the labor you'll put into it, multiply it by your hourly market rate, and that's your "cost" for your effort. _Don't_ go upside-down on this, or you'll sorely regret it. ("Upside-down" means take a loss.)

2) I'm not sure what you mean by "flat fee"...if you mean what it sounds like, that you'll charge the same amount for every project, that's a really bad idea unless all the projects are _exactly_ the same. (Like they've got a product catalog, and every new page they ask you to make is based on a rigid template.)

If you mean that you want to charge a "fixed cost", where you guarantee them a price (within reason), up front, that's not necessarily a bad idea at all. I prefer my projects that way, and price bids almost exclusively on a fixed-cost basis.

The caveat, of course, is that you have to have a very clear idea of when the actual costs, once the project is underway, are exceeding your estimated costs, and get the client to revisit the project scope. It doesn't mean that you have to have a detailed booking system, but at the very least that you're constantly checking the scope of what you're doing against what you thought you would be doing, and alerting the client to any discrepancies as soon as possible.

This is basically an exercise in discipline and diplomacy. Clients don't like to hear that they're being unfair, and in a situation like yours, there's almost certainly someone else they'll be able to pin the blame on. That's the risk of a fixed-price project, though--you're almost guaranteed that _something_ is going to come up and challenge the agreed-upon scope, and it's up to your abilities as a consultant and a diplomat to save your profit by either talking things back to the original scope, or expanding the budget in mid-project.

3) Finally, your cost shouldn't have anything to do, really, with their own project budget, unless they're really making an enormous profit off your back and not sharing it. Not only is everyone else right that they can easily just lie to you about the overall budget, their own internal margin, or whatever, but you don't want to base your own economic success on their ability to negotiate a good margin, and then manage the project profitably.


Figure out what it'll cost you to do it profitably, bid that amount, and manage the scope so it stays profitable.If you can keep it that simple, it's not a bad business to be in.
posted by LairBob at 12:23 PM on October 28, 2004

[thread hijack] LairBob, why do you prefer fixed-cost bids to an hourly rate? I'm honestly curious: The few times I've tried that, I've had to be hypervigilant about scope creep and managing expectations and renegotiating for every new feature -- it's a major hassle and always adds tension to the client relationship. I only ever do hourly rate anymore, which is infinitely simpler to deal with: I can be more flexible about changes, never have to say "no" to a feature request, and never get stuck working for free.

So what's to like about fixed-cost?
posted by ook at 12:47 PM on October 28, 2004

Couple of different things, ook...

1) First of all--and I don't mean this in a bad or under-handed way--but it keeps the client out of your business. When you bill projects on a T&E basis ("Time & Expenses"), you necessarily have to expose the inner workings of what you're doing and how you're doing it to clients, and I've _personally_ never found that to be a worthwhile trade-off.

Now, I completely understand the counter-argument, and I know folks who bill T&E on principle, _because_ of the commitment to transparency and honesty they feel it brings to the relationship, and I'm not arguing with that. As a matter of fact, when I started doing this kind of work 10-15 years ago, I loved the idea of T&E.

What I discovered, though, is that when you're running large-ish projects, with large-ish teams, a fixed-price environment gives you a level of cover where you can still get the client what they wanted, when they wanted it, at the expected price, without having to expose them to "how the sausage is made".

2) Secondly, in a bidding environment, fixed-cost projects are just generally more attractive to clients. Sure, you have to get them to understand that the cost _can_ change, if they change the scope or something unforeseeable arrives and it's not your fault (and that has to be in the contract), but I've personally found that clients prefer to have a legal document that specifies what the hit to their budget is going to be, as opposed to tracking what you're billing them every month, and making sure it measures up against what they wanted to spend.

3) A fixed-cost project gives you the leverage to structure better payment terms. I typically structure contracts to deliver 25% on project initiation, 25% at some internal milestone about half-way through, and 50% on delivery. Sure, those are all deliverable in 30 days, but so's the monthly bill you give in a T&E project. You _might_ be able to structure an upfront payment on a T&E project, but the very nature of the agreement makes it much harder.

4) Maybe most importantly, all those "downsides" you were talking about, like being "hypervigilant about scope creep" are maybe the best argument for a fixed-cost approach. I see where you're coming from, but I also get the impression that you're basically working solo. When you've got a team of 15, 20 people or more working on a project (or even just 5 or 6), you really _don't_ want an attitude that "you never have to say 'no' to a client". Working from a fixed budget helps instill an internal attention to scope that's critical to managing a profitable agency.

I don't mean at all to imply that you're being lax, or undisciplined. If you can take the T&E approach like you've described and do great work for happy clients, then more power to you. I'm just answering your question on what I've found personally. Like I said, I used to totally prefer T&E, but as I've done this longer and longer, I've just found that fixed-cost projects have a lot of practical advantages--at some "cost" in terms of flexibility, etc., but most of those are costs you need to pay anyway, to run a decent-sized profitable shop. Fixed-cost just helps make sure you're paying them. (Plus, like I said, clients like to buy it.)
posted by LairBob at 1:13 PM on October 28, 2004

_{OK, now I need to leave the Starbucks where I've just been killing time and drinking coffee--if you couldn't tell--and head out to a meeting...}
posted by LairBob at 1:15 PM on October 28, 2004

That makes a lot of sense. You guessed right, I'm solo, which makes some of your points less of an issue for me than they would be for a team... Generally I'm working so closely with the client that transparency is a given anyway, and I can afford to be more relaxed about payment schedules because I don't have salaries to pay (other than my own, of course).

Your second point is probably the one that's most relevant to a solo consultant... I've had a couple people balk at the idea of an open-ended fee. The best way around that I've found is to start with a smaller project, or with just one component of a larger job -- gives them a way to try me out and see if they're getting what they're paying for. (And just as importantly, gives me a chance to weed out the bum clients early on.) But that does take some salesmanship, and doesn't work for everybody, so it's not a perfect solution.

Anyway, thanks. It's good to be reminded that the way I do this stuff isn't the only way to do this stuff :)
posted by ook at 2:28 PM on October 28, 2004