Theaboutbox Tech Blog

I have been thinking all morning about Every Billable Hour is Amateur Hour. Erik argues compellingly against the pitfalls of freelancers building their ventures on Time and Materials (T&M) projects. You should read the whole thing, but to summarize:

• T&M can commoditize the service you offer, leading to downward rate pressure.
• While T&M promotes grinding, Firm Fixed Price (FFP) drives the balance of maximum value for minimum time.
• Companies often regard T&M contractors as employees, sans the paperwork.

Can you scale a T&M consulting practice?

It is possible to achieve scale with hourly billing: hire employees or subcontractors and charge enough margin to clients to cover bench time and administrative overhead. This is what most professional services firms do. It can be lucrative but it scales the perverse incentives too. The most successful tech consulting practices that take this approach tend to find a niche and provide staff-augmentation. One of my colleagues ran a practice sourcing security-cleared network engineers and IT operations people for classified DoD projects. The niche helps fight the commoditization and the business value to the client is in the firm’s ability to network and find difficult-to-source candidates.

The downsides also scale with the size of the practice. Once you hire people to provide services, you need to keep them utilized in order to make money. If you are a practice lead it is almost certain that a big part of your bonus is tied to hitting a utilization number for the people in your practice. The best way to hit utilization numbers is to optimize for projects where your people will grind the highest number of hours for the highest rate possible. Chances are these projects will not have enough in common to have any real repeatability. A consistent influx of projects and timely payments from clients is essential; otherwise, the system’s fragility becomes apparent, leading to erratic hiring and layoffs.

Are there hybrid models?

It is also not an ‘all-or-nothing’ proposition. My wife’s public relations firm works on a T&M basis with some clients and on a per-deliverable basis with others, having a price schedule for white papers, articles, press releases, social media posts, etc. In the IT world, it is common to build an application on a T&M model and provide ongoing sustainment / managed services on a FFP basis.

Pitfalls of Firm Fixed Price (FFP) Projects

I completely agree with Erik’s view that FFP makes us have skin in the game when defining scope and correctly focuses us on providing the most value in the smallest amount of time. It also encourages us to develop unique IP and solutions that develop a unique edge. That said, FFP is scary. I could write a book on mistakes I’ve made throughout my career on negotiating and executing firm-fixed price projects, but here are some highlights:

Don’t have 100% of the payment due upon acceptance

Typically FFP projects define a total price with a series of milestone payments. There is an art to defining the milestones so that you can have healthy cash flow and customers feel comfortable, but never have all the money due at the end. If your customer pays you early in the project as promised you will probably not have issues at the end. When possible, it is nice to have a small ‘get started’ payment to kick off the project, ensuring that everyone has skin in the game.

Have some guard rails for time

There should be some upper-bound on time. Every project has unknowns that affect the schedule. The upper bound should be high enough the client feels like it is really fixed-price but provide some leverage to change the scope if large enough unknowns are discovered.

Be explicit with assumptions

Do you require physical access to a facility? Software licenses? Do you require certain stakeholders to provide you information or feedback within a reasonable amount of time? Are there any other things that need to be in place in order to be successful? This is the time to think clearly about the risks that affect your ability to deliver value in a reasonable amount of time, discuss them with the client and agree on them.