We are in the midst of a multi-part discussion about how service firms bill for their services. Between hourly, retainer and project fees, there are a lot of ways that service firms bill for their work. We are looking at each method, its strengths and weaknesses, and also some alternatives.

There are three methods that I’ve seen clients use and each has their advantages and disadvantages: Charging for time (e.g. the “billable hour”), charging for production (project fees or monthly retainers) and pay for performance. Today we’ll look in detail at charging for production.

Not charging for time

At some point, most service firms decide they need to find another way to charge their clients besides hourly billing. They can do this by defining the beginning, middle and end of a project, or by using some type of retainer/fixed-monthly-fee arrangement.

The idea here is that a client has an easier time determining the value they will receive from a project. So, instead of working out what it will cost you to complete a project, you can calculate what value the client will receive and see if we want to do this work for that price. Project pricing then provides incentive for the service firm to complete the work at a value that ensures the client will earn a return.

In order to do a good job of creating the project plan (which is critical to determining whether we can deliver the project at a price that represents a good value to the client) we need to have a very good understanding of the state that the prospective client is in. If we agree to a project fee, and then find out that the client doesn’t have much of the basic information available that we need, then the cost for the project can skyrocket; but the compensation is fixed (bad deal). So whenever you are planning a fixed fee project it’s imperative to have an “assessment phase” on the front end, where all the inputs to the project can be gathered and you, and the client, can clearly determine what needs to be done, by whom and with what result.  This process is usually too extensive for the service firm to do for free, but can be done for a reasonable (fixed) cost.

When we charge a project fee we preserve the upside (if we finish quickly we earn more money) but accept some downside risk.  Of course negotiating change orders as the project progresses can mitigate that. One of the biggest advantages of project billing is that it requires the advisor to constantly be communicating with the client about how the project is going, warning them when it could be getting off track, and identifying risks and mitigation strategies. This is also the major downside to this payment mechanism. It requires a skilled account manager/project manager to stay on top of changes in scope and negotiate associated changes in payment.

If you charge a retainer (e.g. a fixed monthly fee that represents the expected value that the client receives) you may not get paid for every hour although not every hour you spend on a project creates value. So, sometimes you will have to over-deliver in order to deliver value, and other times you will deliver TONS of value in a few minutes and therefore be able to push more work out into the future and make more money per hour. In most of the firms that bill this way, they schedule a list of deliverables to be completed this month, and have some forecast for what might be completed in the coming months, but it retains flexibility to use the brain of the advisor in any way that is needed. This works best for smaller firms or where the client is “renting” the advisor’s brain. The advisor remains in control of the “effort” they are delivering (you can always set deadlines in the next month) the client determines if that “effort” produces a good value. Again you need to be in constant conversation with the client about what value they receive to ensure that you are meeting their expectations.

Have you tried project or retainer billing? What has worked or not worked for you?

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Brad Farris is a small business advisor with Anchor Advisors, Ltd. in Chicago, Il. Since 2001 Anchor Advisors has been helping creative professional firms to grow, by helping them clarify their purpose, get the most from their people, keep their eye on key performance measures, and implement consistent processes. Brad is also the author of The Business Owner’s Champion: 6 Practices to Build your Nerve and your Business.