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Pricing Web Projects: A Project Manager’s Perspective
Throughout my career, I’ve managed web projects with various pricing arrangements. From fixed fee to hourly billing and even bartering, I have seen pros and cons to each of these scenarios. I’ve been an avid hourly billing supporter for several years, but I recently had the opportunity to manage a fixed fee project and was reminded of the benefits to this approach as well.
Fixed Fee Billing
For years, I almost exclusively worked on flat fee projects as my first web agency had this model which influenced my project approach when I took on my own clients. Fixed fee billing can have some real advantages.
- Client Peace of Mind – All projects have risks and a fixed fee puts the risk of accurate estimates on the service provider. The main area where I’ve seen clients become frustrated with fixed fee projects is in not understanding the terms of the project and assuming features that seem easy are included. I always recommend to not just email off a scope of work, but take time to walk through it in detail with a client to be sure the project and its constraints are clear upfront.
- Profit Opportunity (or Risk) – If you are good at selling high-margin projects, or can accomplish the work quicker than estimated, you can realize pure profits that hourly billers cannot. Conversely, if you’ve underestimated the work or have trouble sticking to the scope, you could be on the hook for a lot of unpaid extra work.
- [Lack of] Time Tracking – Many people don’t enjoy tracking their time in detail or the project management work involved in hourly billing. This structure provides an opportunity to manage to broader financial business metrics and have one less factor to worry about in producing a successful end product.
About three years ago, I made a commitment to start quoting projects only on an hourly basis instead of a flat fee. My current company has an hourly billing model which appealed to me during my interview process. Although I appreciate both methods, hourly billing has tremendous benefits too.
- Adaptive Approach – Hourly allows for a more adaptive approach to changing business needs, rather needing to define everything upfront. Larger web projects that span months or years benefit from the ability to regularly iterate and adapt based on new information.
- Alignment of Interests – Hourly billing rallies both client and agency on the same team to best use the hours allowed. There is no incentive to profit for the agency or negotiate under cost for the client. Software is often difficult to estimate and business requirements change over time. Having everyone in alignment to work toward the same goals of project success makes a project run much smoother.
- Scope Clarity – As a PM, one of the great advantages for my role is managing scope to hourly units. Although I always strive to ensure clients have a clear understanding of scope, nothing is easier to bridge the natural communication gap between industries than an hourly unit. No matter how clear a scope is written, subtle assumptions can and do still happen which are more difficult to manage well with clients.
Which Pricing Method Is Better?
Like any pricing strategy, choosing the best pricing model depends on several factors and may require some experimentation to find the right fit. What type of projects (size, duration, complexity, variability) do you typically take on? What best fits your desired sales and operations process? Do you have PM or pricing methodologies that you feel strongly about?
In my current role, hourly billing is more beneficial to me as a client and project manager. It frees me up to not worry about scope assumptions and sets a clear boundary of when a project is done. It does require frequent and sometimes difficult conversations about money and prioritizing tasks that may not be included in the remaining budget. However, I am currently working on long, software-based projects with a lot of variability and little definition in the sales process. I may have a different opinion should I be working on different types of web or digital marketing projects.
Mix It Up
Getting experience with multiple methods can be a great teacher, and some projects may fit better with a certain pricing approach. Occasional flat fee projects can be a welcome relief to teams that normally bill hourly. A recent flat fee project allowed our team a wonderful opportunity to refine designs to the art director’s satisfaction as well as learn a platform on a much deeper level than we would have with the typical concerns of budget impact. The team was happy and we reaped the benefit of platform knowledge that can be used in the future.
Beware Hybrid Expectations
One pitfall to avoid is an hourly billing arrangement with a fixed fee expectation. In this situation, a client is provided an estimate for a project based on a range of hours with an understanding that the desired project can be completed within the estimate range. The flaw in this situation is that the project hasn’t been scoped as thoroughly as a flat fee project, but is still held to the same delivery standards.
This is an extremely difficult position to be in as a client and project manager as it ties our hands and can often end up with the dreaded combination of running out of budget too early with an unfinished product (and an unhappy client). I’ve found that hourly billing works best when both the client and agency commit completely to the hourly method of discovery, adapting and prioritizing scope.
I discussed only my own experience with flat fee and hourly billing in this post. There are other methods that are becoming more popular, including value based pricing. I don’t have the experience to comment on this, but wanted to provide links below for more information.
- Agency Pricing Models by Karl Sakas
- Pricing Design Book
- Hourly Billing is Nuts
- Businessology Show: Value Pricing | Hourly Pricing
- HubSpot’s Agency Pricing Models
Intermediary by Arthur Shlain from the Noun Project.