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[Ask Catalyst:Ed] Fixed price or hourly? Structuring your project contract

Here are two things that happened earlier this week:

From an email:
Expert: "Hey, the project scope says the project will have a deliverables-based contract. Can you explain what that means?"

From a scoping conversation with a client:
Catalyst:Ed: "Do you have any thoughts on whether this should be a fixed price contract or an hourly contract?"
Client: (silence)

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Contract terminology can get confusing. So here's a quick primer (and we'll do a blog post with a deeper dive into the not-always-fun world of consulting contracts sometime soon).

Contracts typically tend to be of three types:

  • Deliverables-based (aka fixed price contracts)
  • Hourly contracts (aka time-and-materials or variable contracts)
  • Retainers

Here's where the rubber hits the road - the specific type of contract you sign for a project determines how you get paid.

For deliverables-based contracts, the client agrees to pay a fixed, pre-negotiated amount when the consultant completes and hands over the deliverable. The contract, in such cases, will lay out:

  • The deliverables (interim and final)
  • The timeline for completing the deliverables)
  • The amount payable by the client for each deliverable

Here's what that could look like for a hypothetical strategic planning project:

Project start date: 07/01/16

Deliverable Format Due date Amount Invoice date

Report summarizing key research findings

Word doc

08/01/16

$5,000

08/15/16

Draft deck with key findings, recommendations and next steps

PowerPoint presentation

09/01/16

$10,000

09/15/16

Final deck with key findings, recommendations and next steps

PowerPoint presentation

09/15/16

$5,000

09/30/16

Implementation plan with key tasks, milestones, responsibilities and timelines

Excel spreadsheet

10/15/16

$2,500

10/30/16

The expectation here is that the consultant gets paid the fixed amount once the deliverables are submitted, irrespective of how much time she actually ends up spending on putting the deliverable together.

In hourly contracts, on the other hand, clients pay consultants based on the actual amount of time spent on the project. The payment period can be monthly or fortnightly. For a monthly contract, the consultant adds up the total amount of time spent on the project in the previous month (in education, time is often billed in 15 minute increments). The total number of hours is then multiplied by the agreed-on hourly rate to arrive at the invoiced amount.

A related type of contract that we often see in education is the hourly contract with a "not to exceed" clause. The expectation here is that the client pays the consultant based on actual hours spent up to a certain pre-agreed amount.

And finally, we have retainers. In these kinds of contracts, the client agrees to pay consultants a certain amount every month, with the expectation that the consultant will put in a certain amount of work. So, what kind of contract is best for the client and what kind is best for the consultant? Well, it depends on the project. When we scope projects for clients, we typically categorize 60% of projects as fixed price ones and 30% as hourly ones, with the remaining 10% being categorized as retainers.

In a perfectly predictable world populated by robots and with full information, a fixed price contract would work in the same way as an hourly contract. Unfortunately, we live in a world where circumstances change, individual capabilities vary and new information is often revealed. In general, when the project scope is clear and deliverables are well-defined, fixed price contracts work well. They offer clients the assurance that the work will get done without the budget getting out of hand. Consultants often find them easier to administer [1], plus they benefit if they end up doing the work more efficiently than they had originally budgeted.

For projects with a more ambiguous scope, hourly contracts might work out to be much better. For instance, one of our nonprofit clients needed several different grant proposals and reports written during a period of staff transition and did not know how easy or difficult it would be to find the necessary information. In this case, the hourly contract protected the nonprofit from paying too much if the information was easy to access, while at the same time, protecting the consultant from being paid too little if finding the information required a lot of legwork [2].

Retainers are best suited for interim and part-time consulting roles. They offer consultants a stable source of revenue while capping the monthly cost to clients.

Finally, here's a handy little chart laying out the differences.

Fixed price Variable Retainer

Also known as

Deliverables-based

Hourly OR Time-and-materials

Monthly fee

Best suited for

Well defined projects

Projects with evolving or ambiguous scopes

Interim or part-time roles

Invoicing timeline

After "product" is delivered

Usually monthly

Usually monthly

I hope this was helpful! Feel free to add your thoughts or additional questions in the comments section below.


Notes:
[1] Fixed price contracts require more time up-front in estimating the amount of work needed to complete the work. However, they require less effort in terms of ongoing time-tracking.
[2] Even though time-tracking is not required for fixed price contracts, it's a good discipline to follow if you're a consultant. You'll often be surprised at how "off" you were when you estimated that the work would take X hours to complete.

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"Ask Catalyst:Ed" is a new section on our blog. This is where we'll be posting quick, practical responses to all the great questions that we receive from our community of users.

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About us: Catalyst:Ed connects education organizations with vetted experts for short-term, mission-critical needs. More than a directory of experts, we set up projects for success by investing time and resources into scoping out projects (at no cost to organizations!) and matching projects with experts who are the right fit. To learn more about how Catalyst:Ed can help you gain quick, reliable and affordable access to expertise for your most pressing requirements, please visit our website. Ready to get help? Schedule a needs assessment call. Want to join our network of experts? Apply to join here.