WA Consulting: Fixed Price Or Hourly?

October 6, 2007

Should WA consulting firms — or for that matter, conversion consulting firms, or management consulting firms — price by the hour or by the deliverable?

That was the question I started to discuss with Frank Demmler, who teaches in the Tepper Business School at CMU and is portfolio manager of Innovation Works. But we were cut off by time, and I never really got to tell him my problem (which is that my company mostly does fixed price work, and then works twice as hard as we should even if the customer doesn’t ask for it, just so that we delight the customer. Another one of my CMU-professor-friends, Economist Marty Gaynor, told me that this is a variation on “winner’s curse.” But I digress.)

I saw Frank yesterday again briefly, while on break from the Google Analytics Implementation seminar I taught across the hall, and then he sent me this advice on fixed price vs hourly:

Regarding pricing, as we discussed briefly, it’s a classic damned if you do, damned if you don’t conundrum. The granularity and visibility of hours is providing ammunition for an almost inevitable battle. A fixed price contract is one in which the client will rarely be satisfied and will claim that the contract included things that it didn’t.

One overriding comment is that you need to be disciplined and fairly aggressive to train your clients in either case. If it’s hourly, don’t allow yourself to get bogged down in the details. If there’s a substantive disagreement about project scope and resultants costs, that’s worth discussing. Otherwise, stand your ground and claim that you are a professional providing professional services and that’s what they cost. If they want to terminate the contract, so be it. Similarly, on flat fee project work, I’ve never seen a project that was correctly spec’ed out at the beginning. You’ll know when things are going off track. Rule of thumb is at the midpoint of the project, you should have a meeting to discuss progress and where changes have occurred that require an amendment to the existing contract and the fees for doing so.

I am hoping to talk to a lot of my friends this coming week about how to run a consulting company (but remember: not about prices themselves. That’s collusion.) So I wanted everyone to have the benefit of Frank’s thoughts.

Also, if you are a WAA member, you should read this article I wrote a week ago on the WAA site about the economics of running a WA consulting firm. I keep trying to pull the analytics for that page (does anybody read it beyond the eight people who starred it and the three who left comments?) but they make my computer crash. Every time.