There are many different contract types and fee structures that can be used by professional services. This raises two questions: What are they and when should I use them? I’m glad you asked. Here are 12 contract types for professional services and when to use them.
First, let’s group these contract types into four major areas:
- Fixed Fee
Now let’s take these a step further so you can see where we get the 12 contract types for professional services, and then we’ll discuss when to use them.
Here’s a fun little interactive app you can look at to browse these (try the search box top left, after you click through):
- Fixed Fee
- Hourly Not to Exceed
- Recurring With Cap
- Cost + Percentage
- Cost + Fixed Fee
- Recurring + Expense
- Recurring + Hourly
Most of these are pretty straightforward.
Fixed fee is just that.
When should you use it?
When you agree with your client that you will get the job done for a fixed amount. Period. Make sure you’re clear on the scope and where the line is, after which change orders will be needed.
Hourly Not to Exceed is a hybrid. If hourly contracts and fixed contracts had a baby, this would be it! It’s exactly as it sounds. You bill by the hour, up to a set limit.
When should you use it? Never! Just kidding. My feeling on this is that, you might as well just go with fixed fee–this way if you wind up getting the work done more efficiently, you reap the rewards. However, if the client is balking and you feel very confident that you can get it done in few enough hours (without exceeding the cap), then this might make the difference between winning or not winning the contract.
Percentage is easiest to think of as a modified fixed fee contract. You base the fee on a percentage of a fixed contract amount.
When should you use it? One easy example is if you have a contract to work on a home that was in a fire. Your normal contract amount for the rehab job is $100,000, but your client received an insurance settlement for only $75,000. So you agree to work on a percentage, based on the settlement. Now you have to increase employee utilization rates by 25% to retain the same profitability :)
Recurring with Cap is just a fixed fee divided into even amounts.
When should you use it? I see this as a cash flow play. This lets the client spread the payments out, so it’s less painful, and you have recurring cash flow.
All fixed fee contract types in BillQuick will track your billing, compared with the contract total. Once your billing hits that ceiling, all billable time will be automatically marked non-billable. You can override these settings on a project by project basis if you need to.
If I have to explain this? OK, I will.
These have no fixed contract amount. You work, You track the hours, and you bill the hours. You can record a contract amount for reference in BillQuick, but if you choose hourly as the contract type, the contract amount has no implications, as it does with fixed fee contracts.
When should you use it? When the client is willing to agree to it? As much as this seems attractive like you’re covered because you get paid for the time you work, you could actually be losing money. As your firm gets better at the work, and you get more efficient, it takes fewer hours to get the job done. Now you’re getting paid less while the deliverables have not changed. Clients are getting the same value. You are getting a cut in pay, for being good at your job.
Cost + Percentage
This is where you bill your cost plus a percentage of the costs as a progress bill. If the total contract amount is $1,000, and your fixed fee % is 10%, and the value of your billable time and expenses is $500, then you bill $50. $500 x 10%. The total bill would be $550. Your cost plus the 10% of your costs.
When should you use this? When you feel that the costs of a project are the major driver in terms of the work that needs to be done. This allows you to bill evenly based on how much of the total costs you’ve incurred to date (the value of the billable time and expenses).
Cost + Fixed Fee
This is just like Cost + Percentage, but based on a fixed fee instead of a percentage.
If you ask me, the Cost + methods are overly complex. I would much rather simply bill a flat fee, and come up with a payment schedule. My favorite kind of payment scheduled is 100% up front. If that doesn’t work, then 50% up front, and 50% on completion. Simple.
Presumably, this means you bill a fixed recurring amount, indefinitely, until the job gets done, regardless. If you can get a client to agree to this? Awesome. Do it! The less efficient you are, the more money you make.
When would you use this? In all seriousness, this is your classic retainer type contract. I do this with many of my clients. They pay me a fixed, recurring amount, each month. It is also clear what they are getting from me each month, X number of videos, weekly calls, reports, etc…
This is really a fixed fee contract on a recurring basis.
Recurring + Expense
This is a recurring contract, where you bill your expenses back to the client, over and above the agreed upon recurring contract amount.
When should you use this? This is used in the same scenario as a recurring contract, but where you know you will have significant and unpredictable expenses associated with doing the work. When I am asked to speak at an industry event, this is the kind of contract I use. It’s based on a daily fee, plus travel expenses. Then I am at their disposal–as many talks or panels as they want me to participate in, I am all in.
Recurring + Hourly
Let’s say you have a fixed fee pricing model or plan with a cap on the number of hours. That’s really just an hourly model, but let’s ignore that for the moment.
In these types of contracts, there is often a clause that says something like, “…up to 10 hours per month, plus $150/hour thereafter.” This is recurring plus hourly.
When should you use this? When you want to offer what looks like fixed fee pricing, but you want to hedge yourself against people taking advantage of you.
This brings us to our last group of contract types.
Oftentimes we start working on the project before it becomes a project. From taking the prospective client out to dinner to spending hours preparing a proposal, there may be significant time and expenses spent on a client before they ever become one. This is good information to have. Using the marketing contract type on a project in BilQuick allows you to track exactly these sorts of things.
This is how you can set up a project or projects in order to track time and expenses spent on your own firm. All of your admin costs and anything you will never bill to or associate with a client can go into a project like this. It’s a great way to create a cost center, to track the costs needed to determine your burden rate.
So there you have it: 12 contract types for professional services, and when to use them. Choose them, and use them wisely. Don’t forget to watch the video, so you can see how nicely BillQuick Online handles these 12 different contract types.