How much is that? Are you sure?
Consultants, CPAs, attorneys and other professionals have long relied on time & materials billing as a cornerstone of project costing. When a client approaches with a problem, they estimate the number of hours they will likely need to complete the work and then multiply that by the hourly rate they charge for that type of work. So if they think the client’s project will take 100 hours and their hourly rate is $150/hour, they can quote $15K for the work “give or take”. Some may even provide a low, likely and high estimate to allow for the fact that the client will be billed based on the actual number of hours it takes, regardless of what was originally quoted.
Tragically, an estimate is an estimate and, in many cases, the total effort necessary to complete the work exceeds what was originally envisioned. This can occur for a number of reasons, but common reasons are insufficient scoping or inefficient execution. This sometimes results in open-ended engagements where the consultant continues to bill the organization long after the original budget is consumed. This is bad for both the organization and the consultant who must justify why the original estimate was so far off. At the end of the day, the time & materials billing paradigm leaves the client holding the bag and eating the difference.
In our work with nonprofit organizations, we have found that two important factors most often result in a successfully, on-budget project:
- Comprehensive Discovery & Scoping – Perform detailed discovery and scoping prior to beginning the project. If you know exactly what Point B looks like and you have a clear roadmap for getting there, it’s less likely that you will see constant shifts and changes throughout the project.
- Guaranteed, Fixed-Price Engagements – Instead of estimating the effort necessary to complete the project, agree to a fair price for the finished product. If a successful project is worth $X, agree to $X instead of gambling on the unknown of how many hours it will actually take your consultant to do the work.
There are many advantages to this approach beyond what has already been stated. Eliminating the uncertainty about the cost is something every nonprofit can appreciate. Avoiding any risk of having to go back to the board of directors to authorize more money for the project than was originally anticipated is highly desirable.
Some final thoughts to keep in mind:
- Keeping, monitoring, questioning and signing off on timesheets is an inefficient hassle for both you and your consultant. If you take that out of the equation, greater focus can be placed on completing the scope of work.
- You can’t establish a fair price without doing sufficient discovery on the front end. If someone offers you a fixed price, but hasn’t asked many questions to scope the project, read the scope carefully and be ready for change orders.
- Some providers will, with good intentions, provide a low hours estimate of the effort necessary to try to keep the price down in cases where there are strict budget constraints. This can be a recipe for disaster since the effort necessary to achieve point B doesn’t change based on good intentions. You end up with either incomplete work, or paying more.
Remember, in a time & materials billing situation, it is the consultant that is protected from risk. If you get a well-scoped, reasonably priced fixed-price engagement, you are the one who is protected.