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My boss has always operated on fixed pricing projects; where we rarely see a profit on. I'm on board with selling our clients hourly rates on large projects. We have yet to get a client willing to buy our services on an hourly basis.

What are some good persuasive arguments for helping clients see the value of an hourly estimate as opposed to a fixed price budget?

My boss argues that he could sell an hourly budget but no one has a sense of it providing more value.

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    Can you provide some additional information about the services or/and the project? I can only guess why do you think the hourly rates will be better and I am not sure if you want us to make up arguments or to find true ones but more persuasive... – Bartosz Rakowski May 23 '11 at 17:37
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It doesn't sound like a good argument could be made that would make sense for the client.

If you are losing money on fixed price projects then the client is getting much more than what they are paying for. Why would they want to change?

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  • Totally agree. Instead of covering your losses by customer's money - think about flaws in your business. Why exactly are you losing money. – yegor256 May 24 '11 at 5:12
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In a fixed fee contract, all of the risk associated with costs are carried by the contractor and in an hourly contract, all of the risk associate with costs are carried by the client. That naturally makes clients prefer fixed fee.

The architecture world, preliminary design tends to be hourly. because the scope is very vague or unknown. During the design, there is flexibility for both sides - the client can add or subtract scope, play with the endless "what if" scenarios, and play with the idea. That is the angle that you can use to "sell" the idea: Hourly = Flexible

Once there is a clear scope and it is time to dig into the guts of a project, you can switch to fixed fee and plan in some real profit margin to protect against unknown. You need to write in clear change management process, though, to ensure that your payment increases when they change their mind.

And stay away from an hourly-not-to-exceed contract. That is the worst combination for the contractor - all the risk and very little of the reward.

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Whether you enter into a T&M type contract or fixed price depends more on the level of definition of the scope than it does to make a seller more profitable. T&M contracts are more suited in outsourced type services, where the contractors become more of an extension of the organization's employees, or where the scope and its requirements are vague and too ambiguous to nail down, i.e., the buyer is not totally clear on what it wants or needs at the time of project start. Under a T&M, the buyer owns the cost liability solely and, therefore, must manage costs in a very different way than on a cost plus or fixed fee contract. If you are a seller in that arrangement, you lose control over that in its entirety. If you feel you need a different skill set, more staff, less staff, whatever, too bad. Not your choice under this arrangement.

If your work is such that the scope is well defined and requirements are reasonably clear, a FFP contract can be a much better vehicle for you, i.e., you have more control and can be substantially profitable. If, as you wrote, you have trouble making a profit, it is not the type of contract that is the issue but rather your organization's estimating capability. Fix it.

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A fixed price contract typically works on shifting cost risk from buyer to seller:

  1. In a T&M contract, the client has the budget risk of the project. The client is generally less experienced in doing IT projects, so the risk is high. He will estimate a budget contingency of e.g. +100%.
  2. In a Fixed-price contract, the supplier is responsible for completing the scope in the least amount of money possible. He is experienced in doing this, so will estimate a required contingency of +30%. For the client, he bills +50%.

The case for T&M work can only be made if this will result in a lower end price for the client. You could suggest Agile contracts with clauses like "money for nothing", allowing a client to cancel the project at any given time. You can also suggest a "proof of concept" phase after which the client can still refuse continuing the project at no extra charge.

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