Project and Hourly Pricing

One of the most difficult parts of my job is how I price projects for prospective clients. The benefit of project-based pricing to the client is quite simple: they can easily budget for the project with some level of confidence that the price will not change. Combine that with my attitude of sticking to the quote throughout the project, and the client will be quite happy.

From my perspective, though, this creates something of a problem. While the client wants to know the price in advance, I often cannot accurately predict the amount of time I will need to spend on the project, and ergo, the price I should charge. Part of the reason for this is that often at the early stages of the project, the scope is not well-defined, and cannot be until the project begins.

When possible, of course, I will bill in increments, with certain milestones ending the various stages, at which point I estimate the cost for the next component. But this is not always possible, and often is not acceptable to the budget-conscious client. When billing like this, there is little difference between project and hourly billing, and so the client would often be better off being billed by the hour directly.

One strategy I’ve tried, with some success, is what I term exclusion billing.

Exclusion Billing

Basically, I look at the project and break it down into large components. I then exclude certain components from the bid, because I expect them to be harder to estimate until more information becomes available. I then recurse into each large component, and break it down further using the same system. When I give the quote, I detail which large components are included in the quote, and which smaller components are not. I also explain why I’ve excluded items, but it gives the client an idea of what I’m prepared to put into the project under the quote without haggling.

The problem with this is scope creep, and that’s for the simple reason that since I quote by exclusion, if I haven’t explicitly excluded something, I am usually required to include it under the original quote. What I’ve found is that while some clients abuse this to try to include as much as possible, many will work with me to determine what’s fair.

What’s Fair Billing

This is perhaps the most arbitrary system, and it really only works when you have a solid relationship with the client. Basically, you give them a price, and tell the client that it’s based on a reasonable expectation for what will change during the course of the project. Perhaps the original estimate was for 200 hours, and you quoted at 240 hours (20% contingency for scope creep and unexpected surprises). The official contract says that you’ll work on the project and complete certain pieces. It excludes certain items from the quote.

It also says that items not mentioned will be dealt with fairly – that is, if it’s reasonable that the client should expect you to have included it under the original quote, then you’ll include it. If it’s reasonable for the provider to assume that it would have been excluded from the quote, then it will be extra.

Naturally, this system is incredibly hard to get working in real life, unless, as I said, there’s a good relationship between the two parties, and both are trying to be honest and fair.

Inclusion Billing

This system works both for and against the provider. Basically, the quote will only include those items listed explicitly. Anything not in the original quote is extra.

This sounds great, except that in most projects, you can’t predict everything that will need to be done before the project starts. As a result, if you stick to this system, the client ends up being billed for many items that should have been included on the original quote. Also, the client will now need to haggle over every last item, since the billing is being done at that level.

How about you? What have you found to work when writing quotes for large projects? How do you ensure that you quote your clients accurately so that the ultimate cost of the project is fair to both parties?