What billing model should I use as a consultant?

What is hourly billing?

Billable hour invoicing is widely used, often called 'time and materials' on the contract, and in service industries, time is often the most significant proportion of the cost of the whole project. It is the most convenient model for the consulting agency, because it minimises their risk, and allows the greatest flexibility: if necessary, scope and requirements can be changed in every sprint in a very agile manner.

But a billable hour approach may not be ideal for the customer. With a time and materials contract, it is difficult to predict the final date and cost of a project: they may end up with much less function or a much bigger bill than was originally anticipated.

With a billable hour model, it is important that as an agency, you document clearly the hours spent and the features produced for those hours. It is also important that the customer is involved in all the decisions around scope and requirements changes.

What is fixed price billing?

Fixed price invoicing allows a customer to agree up front both the scope and the cost for their contract. It moves most of the project risk almost entirely onto the consultancy. It can work well for projects that involve similar and relatively predictable activities for lots of different customers. For example, you might provide a standard package to maintain web servers, design a new website, or perform monthly book-keeping tasks.

But fixed price invoicing limits the ability of the team to change scope if the customer or external requirements change, it can lead to disputes about the definition of 'done', and in the worst case scenarios, as a consultancy you may make a loss on a fixed-price project.

With a fixed price model, it is critical to specify requirements very precisely, if possible with detailed descriptions of user activities. In the IT industry, there has been some progress in behaviour driven development (external link) to document requirements that translate immediately into automated tests, as well as proving that the requirement is met.

Is there an alternative billing approach?

A milestone approach tries to combine the best features of billable hour and fixed price invoicing. It breaks down a larger project into smaller chunks. The team will fix requirements and cost for a subset of the full project, covering one or a few sprints, and when the milestone is complete, a new one is built with requirements for the next phase.

A milestone approach still has some of the disadvantages of fixed-price projects, but any dispute or financial loss should be seen more quickly, and restricted to a smaller scope. Both sides have earlier opportunities to identify and fix problems with the requirements or costing process.

What can I do to minimise disputes?

Disputes around the invoicing model and content for creative and bespoke contracts, both fixed price and billable hour, can lead to some of the biggest fights in an agency and with customers. This means choosing the right billing model for your project is important.

Fixed price billing is most likely to be successful where the requirements you are delivering and the tasks you need to achieve are well understood, and you already have a relationship with the customer. Milestone billing can improve on fixed price, by breaking down a large contract into more manageable chunks. Hourly billing is most likely to be successful where the customer is directly involved, for example, when a stakeholder is present in scrum and sprint ceremonies.

Whichever billing model you use, a project manager can help by keeping track of both the hours worked, and how these map to progress through the customer requirements, and by sharing this data clearly with the customer as often as possible.