I’ve been using fixed price contracts almost exclusively since I started freelancing in 2008. If you’re not familiar with the term, a fixed price contract is a contract where the amount of payment depends on producing some deliverable and does not take into account the time taken or resources expended to produce that deliverable. This is in contrast to a time-based contract where the client pays for every unit of time spent on their project, or a cost-plus contract where the client agrees to pay for the contractor’s costs plus some predefined profit margin.
Fixed price contracts appeal to prospective clients for a number of important reasons:
- Most of the risk of the project is shifted from the client to the contractor
- The client knows upfront exactly how much they will pay to receive what is specified
- There is very little administrative burden for the client – they don’t have to review time sheets or address itemized expenses
What’s In It for Freelancers?
While the benefits of fixed price contracts for freelancers are a bit more nuanced than the benefits for clients, I believe they are worth it.
You’ll make more money with fixed price contracts by taking advantage of value-based pricing. Value-based pricing means you charge the amount that your work is worth to your client, not the amount it costs you to produce it. This is a game-changer if implemented correctly.
An example is easy to come by. Recently, a prospect approached me and asked if I could fix some issues on their website for them. They obviously needed it done in short order and it was apparent that the issues were hampering their ability to run their business the way they wanted to.
I proposed an amount I thought would be acceptable to them based on their circumstances (it was in the low four figures), it was accepted, and I went ahead with the work. It took me a total of two hours to finish.
The client was super happy their problems had been resolved so quickly and I made a ton of money for my time. That’s the best possible outcome for any project.
Fixed price contracts lead to a better understanding of your cash flow. This is a really good thing – one of the scariest parts of freelancing is the uncertainty of not knowing when money is going to come in.
For example, you set the price for a particular project at $5,000. Assuming a 40% deposit, you’ll receive $2,000 at the start of the project and $3,000 when it is over. If you stay on schedule for the project, you’ll have a really good idea of when you’ll receive that money. This knowledge allows you to schedule the rest of your work so that you have the money you need when you need it.
One of the big dangers of freelancing is losing motivation to work on a project. In my experience, this is much more likely to happen with an hourly project where you’re unsure of the end then a well-specified fixed price contract where you know you’ve delivered the appropriate items and are going to get paid.
Things To Look Out For
Fixed price contracts aren’t always rosy. There’s a number of situations where they’re going to cause more trouble then they’re worth.
Ambiguous Project Definitions
This is an issue that has bit me (and other freelancers that I’ve talked to) more than any other. You start a project, build something you think the client is going to love based on the documentation you’ve received or produced, and then you deliver. Great! You’re done and getting ready to move on to the next project when your client sends you an email.
Wait, the client says, where is Feature X, Page Y, and instruction Z? You go back and try to explain that those things obviously weren’t part of the project (they’re going to take you 15 hours each, you’re thinking) until you look over your statement of work. That’s when you spot it – an ambiguous paragraph or sentence that could have led the client to believe that what they are asking for was included.
Now you’re stuck. You can either provide what they want, lose money and sleep, and get on with your life or you can put your foot down and insist that the requested items will have to be part of a separate work order. The first option makes things bad for you, the second makes things bad for the client, and this awesome project just turned into a cesspool.
If you’re going to work on fixed price contracts, you need to make sure the project is specified as well as it can be. There can’t be any questions about what is going to be built. That leads directly to the next danger.
Protracted Specification Period
If you’re going to specify a fixed price for a new project and you want to have a good experience, you need to know exactly what you’re building. This can sometimes lead to dozens of emails back and forth where you’re asking for clarifications on seemingly minute details.
While you can probably narrow down the price to a range during this process, it takes time and effort and you can’t be totally sure that your price is even going to be accepted by the prospect. Also, the prospect can get frustrated by all the back and forth and move on to another freelancer that will push forward with the project immediately.
You can mitigate this danger by charging for the specification process, but unless you have an existing point of contact or relationship with the prospect, that doesn’t always work.
Mid-Project Change Requests
Sometimes you’ll get into the middle of a project and a client changes their mind. They want to implement X instead of Y and change A to B. Sure, you say, we can do that, but I need you to specify exactly the changes you want, formalize it into a change request, and I can give you a quote on top of what we already specified.
These conversations are hard. They’re even harder when you have X half-built and the client can’t see it, but wants to swap it out for Y. It can be hard to explain that, while there isn’t a visible component of feature X, you spent time on it and will need to charge the complete price of switching to Y even though they never saw X.
I haven’t found a good way to deal with these things that makes everyone happy. If you’ve found something, I’d love to hear it.
What Do You Think?
I’ve tried to make the benefits of fixed price contracts clear in this post. I’ve had great success with them and I know others have as well. What about you? Do you use fixed price contracts and how have you dealt with some of the dangers involved? Have you encountered other things that make you shy away from fixed price projects? If you use another billing method, I’d love to hear about it in the comments below.