Set fee versus hourly rate

[csd72]

I want to get peoples viewpoint on the pros and cons of doing a project on a Quoted set fee versus hourly rate.

I personally feel that while hourly rate is the safe option you do not reap any benefits fom your increases in productivity from experience or new tools.

For example: I purchase an analysis package that lets me carry out the project in half the time. If I was on an hourly rate then the whole saving would go to the client, even though I spent the money. If I was on fixed fee then I would reap most of the benefit, perhaps giving the client some small portion of the savings.

On this basis I believe that a fixed fee is the only way to earn a good amount of profits and the only real incentive to invest in productivity tools. I also believe that it is the focus on hourly returns that has been a root cause to engineerings reduced monetary returns as when the computer was invented the majority of the savings were passed on to the clients.

It would be good to hear peoples feelings on this.

 

[atook]

I typically proposed a fixed fee, and will quote hourly rates to address small changes to 'final' plans. If the changes are large enough, I give another fixed fee.

 

[GregLamberson]

I bill the following - day rate, lump sum, or hourly. On a lump sum, obviously you better have a pretty good definition on the scope of work and a good contract to back it up.

I also advertise if you don't like the quality of work, you don't pay for it. I've never had a problem. Now that being said, I am not stupid about it either, if I suspect a client may be "frugal" or have that reputation, I may propose a lump sum, but with an upfront fee to get kicked off and some interim milestone payments to assure that at least a large portion is received.

I personally like the lump sum or a fee schedule, as pointed out, if you can do it in 1/2 the time of the industry standard, why should you be penailzed?

Greg Lamberson, BS, MBA
Consultant - Upstream Energy
Website:

http://www.oil-gas-consulting.com

 

[zdas04]

Like the others, I've worked at day rates, hourly rates, and lump sum. It is all about risk. Your risk is lowest at hourly but the return is also lowest (as the OP said).

My risk tolerance is pretty low and I prefer hourly or daily work. When someone wants a hard-dollar bid I carefully estimate how many hours a job is going to take, double it, add 30% to the new sum for contingencies and submit it. I must be doing something wrong because while my hourly rate is the highest in the area, when I add 160% to it I have never failed to get a hard-dollar bid and one client called me and said "are you sure this is your bid?". I thought I was too high, but found out later that my bid was 1/3 of the next lowest. I made a ton of money on that job (I completed it in 96% of my original estimate), I can't imagine what the other bidders were thinking.

David

 

[UDP10]

If your cost to complete a job (including O&P) is $10, you should get paid $10, even if it takes the other guy $20.

If a job costs me $10, and the owner only pays me $8, I'm pissed - and rightfully so. The reverse should be true from the clients perspective.

For us, fees with new clients generally start out as fixed fees or "hourly not-to-exceed." We've found that after we turn a few in under budget, the owners don't have a problem if we go over either. We usually start to get paid hourly, and keep the clients as repeat business...

No need to be greedy - if you're hourly rate doesn't give you enough profit, increase it.

 

[csd72]

Thanks guys,

atook, I think your philosophy is typical of the civil/structural industry. The biggest variance is how people arrive at the fee, do you just base it on your hours or do you factor in things like liability, risk e.t.c?.

Greg,

Sounds like you have a similar attitude to me. I do agree that you need to know your scope well to succeed using lump sum but I think it is the way to go.

Any extreme stories/opinions out there on this matter?

 

[csd72]

UDP10,

What if you quoted $9 and it cost you $10, is the client going to compensate the extra - I doubt it!

I have hear hourly not to exceed described as heads you win, tails I lose and I agree with the criticism. How are you going to make up that dollar above if all your jobs are hourly rate at most.

It is a free market economy, based on the philosophy greed is good. If you agree to do it on an hourly basis, you charge for the amount of hours it took you, but if you do it on a fee basis you should take the profits when you get them. Every other industry(including the one your clients are in) would so why shouldnt we!

If you are charging too much then market forces will sort that out.

 

[atook]

When bidding lump sum, I come up with a minimum based on my hours. Then I take a stab at what the market will bare, and what my competitors bid might be. My goal is to come in under that. If I can't do it for more than my minimum, I don't take the job.

I'm also careful about changes to scope of work. Those are addressed in my contract as an add, and I find that proactive communication helps when negotiating the add.

If I'm worried about the client not paying, I either specify a retainer (25% of fees) or decline the project. I'm an engineer, not a collections agency. If the client has been slow paying in the past, and I still want there work, I throw in a headache factor when computing the bid.

 

[zdas04]

atook,
I think I can see a case where I'm sure another bidder will bid below me, but in that case I just don't bid (the act of preparing a bid costs billable hours). Also I don't care to estimate what the market will bear. If my bid is more than the market will bear then I won't get the job. If all bids are more than the market will bear then either the project won't get done or the market will learn to bear a higher number. Neither situation ever has any bearing on my bid price.

My rule is "the price is the price" and the only way to lower it is to reduce the scope of the project. One client rejected a bid saying he wanted me to do the work but my price was too high. He asked me to reconsider my price so I added 15% and resubmitted. I got the job and the result was a final project cost (of which engineering was an infinitesimal part) of 80% of budget.

Back when I did computer crap for a living everyone was always talking about "the 80% rule" where somehow if you provide 80% of the functionality you'll have a successful product or some such babble. I always asked "do you want 80% of the features to work 100% of the time or 100% of the features to work 80% of the time?". I never got a good answer, but the end users wanted the features that they use to work 100% of the time and the user community tended to include people who needed every feature.

This work is exactly the same. For me to lower a price means that some part of the scope won't get done or the entire scope won't get done right--neither situation is acceptable to me.

David

 

[lkjh345]

csd72:

We much prefer lump sum projects. Its a chance to make a decent size profit on some jobs if we can be effcient.

I agree strongly with GregLamberson. If you are more efficient than the competition, why should you be penalized for this? Or conversly, why should they be rewarded for their lack of effieciency?

We are forunate to have several long standing, loyal clients who pay us fairly for our work. We work very hard to provide our clients with a quality product and provide services 'above and beyond the call of duty'. We are rewarded with repeat clients who pay us fairly and do not solict fees from competitors.

We have found that if you compete on fees only, then there will always be someone willing to underbid you. When you look to compete on quality, its surprising how loyal clients will become.

 

[csd72]

lkjh345,

That is pretty much my philosophy on the subject although it is good that you have found clients that appreciate the added quality. The last 2 places I worked at had a similar philosophy, but they still had major clients that came to them for quality but would give it out to someone else if it was 2k less.

It seemed ridiculous to screww down the consultant that costs you 1% of the project only to risk a construction cost blowout of many times that.

Does your company bundle in construction services (e.g. inspections) with this amount or do you charge those separately? I believe that if you do a good quality job in the first place then you shouldnt have too many problems during construction.

Regards

csd

 

[lkjh345]

csd:

It is surprising, and short-sighted in our opinion, for owners or architects to select consultants on price only. To go with one consultant over another for a few thousnad dollars is potentially penny wise and pound foolish. It doesn't take too many errors or ommisiions on design drawings to chew up thousads of dollars in construction costs and change orders.

We bundle in construction phase services in our lump sum prices. These include shop drawing review, answering RFI's, site visits where applicable and practicle, etc. Even small design changes. This is one of the 'extras' we do verus some other consultants locally. Soome of our competitors charge for every little change. Depending on the size of the project, if a change only takes a few hours, or a day, we usually just do it and don't bother to bill ofr it. The little lost income is more than made up for in loyal clients who pay fairly upfront.

We do not do Special Inspections (concrete strength testing, soil compaction testing, etc). These are usally provided by an outside testing agency hired by the owner.

As you noted, if you do a good job with your design up front, most often construction goes fairly smoothly. The construction phase services tend to be very profitable for us.

Regards.

 

[RDK]

I like working on a fixed fee basis.

I know how long it usually takes to do a job and can give a good price based on the amount of time I expect.

I’ll say that is a 50 hour job at $100 per hour. I offer to bill hourly or will set the rate at $5,000 fixed.

The client usually accepts the fixed fee. It saves me the bother of doing a lot of time accounting or explaining what I did every minute of my time.

When I do longer jobs where I cannot easily control the length of time I’ll often quite on a daily, or monthly fee basis. Again this fee is passed on hourly rates. (a day is 8 to 10 times the hourly rate and a month is usually 180-200 hours.)

About all I really use hourly rates is to show the client the justification for the fixed fee or the monthly rate.

However as a one man firm all I have to lose is some time if it takes longer than expected and not hard cash paid to an employee.



Rick Kitson MBA P.Eng

Construction Project Management
From conception to completion

http://www.kitsonengineering.com

 

[MikeAnd]

I used to work in software development consulting and I would say that we did about 75% quoted work and 25% hourly work. Although, most of the hourly work that we did had not-to-exceed clauses.

I tend to lean towards fixed fee arrangments for the very reason that you mention. My former business partner, and some of our clients, preferred hourly work, so that's where the 25% hourly work comes from.

Mike

http://www.partnerup.com