Billing Models In Consulting
While there are plenty of billing models in consulting the most prevalent are these three: hourly rate, fixed fee, and retainer.
Let me briefly outline these three models and ups and downs of each one.
Hourly billing model suggests billing the customer for all hours the consultant invested for the gig. It is low risk model for consultants since payment is secured by hours investments versus actual results. From the customer’s perspective it is low risk on financial side but very high risk from overall outcome. Use this simple hourly rate calculator to get an idea how much you would need to charge per hour to maintain your dream lifestyle.
Fixed fee billing model suggest that the customer is paying for actual results agreed in the contract and in the SOW (Statement of Work). It is the riskiest model for the consultant since improperly scoped work and too ambitious commitment may lead to time investments beyond that was originally planned and in the end of the day low profitability and damaged reputation. That’s why fixed fee gigs seem to be overpriced at first look since the consultants include this risk in the pricing. From customer perspective it is low risk since he is paying for actual results.
Retainer billing model suggests that “the employer pays in advance for work to be specified later.” (source – Wikipedia). Effectively you are being paid for sitting and waiting for something to happen and that’s when you will be utilized but mostly you are waiting. If nothing happened you are still paid while investing nothing in actual work. Moreover, most of the time you do not have to sit and wait at customer premises.
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image by stephenvance1 November 2011