October 31, 2009
Though many online creative and service professionals use a simple hourly rate as their preferred billing method, flat-fee project work is an increasingly popular approach.
But how can you effectively price a project without losing money, especially if you need to subcontract parts of it?
Tip 1: Limit fixed price projects to those you’ve done before.
One common mistake is to bid on a project that you have no previous experience with. You might have the skills to perform the work, but without a clear understanding of how much time it will really take, you’re at risk for losing money on the project.
Even if you’ll be doing all the work yourself (and thus not paying out more to subcontractors than you take in), there is still an opportunity cost to any project — for the same time spent, you might have earned more by choosing a different project.
So it’s important to limit your bids to work that you’re both familiar with, and have performed several times for clients (successfully).
Tip 2: Track Your Actual Time Spent Against Estimates
Once you’ve determined how long a project will take, and factored in your profit, you’re ready to quote a fixed bid. For example, if you create logos, a new logo design might require 6 hours of effort, including a discussion with the client, the initial drafts, and 2 minor modifications.
If you want to earn a minimum of $40/hour, you could price a logo at $240 to break even, or $300 for a solid profit.
However, if you don’t track actual time spent on a logo project, you won’t know if your project is actually profitable. A particularly difficult client might require an additional 6 hours of work on the logo, lowering your hourly take from $40/hour to $20/hour.
And if you used a subcontractor to design the logo at $30 per hour, suddenly you’ve lost money on the project.
Too many of those money-losing projects, and you’re out of business in a hurry.
So careful tracking of project or client profitability is a good way to see what sorts of projects have the best margins, as well as which clients are the most profitable for your business. Over time you’ll develop a feel for what sorts of projects to bid as flat rate versus hourly, and what types of clients you want to work with.
What works for you?