Fixed-Fee Billing is the Devil

by | Nov 28, 2010 | Marketing

Once upon a time, Forty was totally into fixed-fee billing.  Several months ago we repented of our evil ways (we now bill 100% hourly) and life’s been awesome ever since. 

How did we come to this change of heart, and what does it mean for our clients?

The Quick Overview

Fixed-fee Billing: At the beginning of the project, the agency and the client agree upon scope, time line, and budget.  Payments are scheduled at regular intervals throughout the project, with the final payment being paid upon completion.

Hourly Billing: The agency and the client agree upon an hourly rate, and invoices are sent on a regular schedule (biweekly, monthly, etc.).  There may be estimates, budget caps, etc., but generally no fixed scope or time line.

Clients Love Fixed-Fee Billing (In Theory)

On the surface, fixed-fee billing sounds great to clients.  Everything is sorted out up front, you know how much you’re going to spend, you know how long it’s going to take, and you can withhold the final payment until you’re completely satisfied.  What’s not to love?

Problem #1: The Flawed Assumption

Unfortunately, fixed-fee billing is based on a flawed assumption: that something as complicated, evolving, and variable as a marketing/design project can be completely predicted before it has even started.

Plans change; budgets are cut; new competitors arise; relationships evolve; discoveries are made; trends come and go; new technologies emerge; markets shift; obstacles are introduced; people change jobs; priorities are reevaluated – In a nutshell: life happens.

In the 15 years I’ve been working on design and interactive projects in a variety of contexts, I’m not sure I’ve ever seen one project that actually looked the same when it was done as when it was originally conceived.

If the project always, always changes in the middle, why would an agency bill based on the assumption that they can predict it from the very beginning?  When these inevitable changes happen, they’re only ever seen as unwelcome intrusions.

Problem #2: The Adversarial Relationship

Fixed-fee projects turn the agency and the client into enemies; they’re competing against each other. The agency is trying to wrap up the project as quickly and efficiently as possible, and the client is trying to get as much value as possible out of the agency by constantly requesting changes, adding scope, etc.

Because the agency and client are competing against each other, there’s very little real collaboration that takes place. Openness is replaced with secrecy. The agency talks to the client one way to their face, and another way behind their back.

Problem #3: The Ethical Dilemma

The third issue with fixed-fee billing is the way that agencies profit from it.

The “bad” clients (the ones who always squeeze the scope for everything they can get without paying more) get the best deal in terms of hours worked for dollars paid.

Meanwhile, the “good” clients (those who respect the agency and avoid pushing the scope too much) wind up getting a lousy deal, since they’re getting less work but paying the same.

The good clients are suffering so that the agency can afford the losses they take on the bad clients.  Seems reversed, doesn’t it?

Can Hourly Billing Really Solve Those Problems?

Hourly billing is based on the premise that projects naturally evolve, and that it’s okay for those changes to come up and be considered, even in the middle of a project.

This means that both the client and the agency have flexibility to respond to sudden obstacles or opportunities, rather than arbitrarily arguing about the project scope defined in a document drafted months earlier.

Hourly billing also puts the agency and the client on more equal terms with regard to the overall project budget.  Instead of fighting each other, they have to work together to keep the budget in an appropriate place.  The client has to keep an eye on the number of change requests being made, and the agency has to provide enough value per hour billed that the client keeps them on the project.

Hourly is Flexible. Flexible is Good.

Since switching over from fixed-fee projects to hourly, we’ve noticed a significant change in our relationships with our clients.  We’re collaborating instead of fighting. We’re genuinely communicating instead of just putting on a show. Our clients are paying for the work we actually do, rather than the work that was imagined at the beginning of a project.

We work with our clients to keep the budget within their range, and (because every hour counts) they help us with that by avoiding excessive change requests, revisions, etc.

The change to hourly billing has been huge for Forty, and we now insist on all projects being run that way, without exception.  We understand the initial desire to know a project’s budget, and to have a guarantee that it’ll be locked to that budget, but that’s just not how projects actually work.  We want to work on projects based on reality, not on scope documentation.

Ultimately, our clients have been happier under this new system than under the old one, and that’s what matters most to us.  Happy clients make for a happy agency.

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