What your consulting fee model means and why it matters

In Business by Darren Smillie

Having been an independent consultant for the past year, I’ve ended up using several distinct fee models with my clients and I thought it would be valuable to reflect on some of the lessons I’ve learned regarding which ones work best in which situations. I’ve actively sought to be as flexible and innovative as I can be with my work and, for me, this extends to the way I charge my clients. As such, in some cases the fee models I’ve used have been driven by experimentation on my part while in other cases it’s been due to preference from the client, depending on the nature of the project.

In all cases, the client is, in theory, paying the consultant for the deliverable, providing it meets a quality standard they expect, and both agree to contractually. However, at a deeper level, what the client actually pays for, in regard to obtaining a deliverable they are happy with, can be categorised simplistically, based on the chosen fee model, as the consultant’s time, the consultant’s effort or the consultant’s performance. Each carries different risk levels to the two parties, and, often consequently, different advantages and disadvantages.
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1. The consultant’s time

This means the client pays a fixed day rate for the consultant’s time but the project duration is, at least partially, open-ended. (Even if there is an end date, there is no fixed agreement for how many days of effort up to that deadline are required or, alternatively, of exactly what should be delivered within a fixed time period.) This kind of contract work generally applies better to support-type work, for example a developer supporting ongoing improvements to a website, where the client and consultant work closely together, perhaps as part of the same team, rather than very tightly defined, time-bound projects that are delivered solely by the consultant.

However, I have used this arrangement for long-term clients who send me regular work, rather like being on a retainer. That way you just need a single upfront contract rather than negotiating everything afresh each time a new, even small, project arises. That keeps things simple but, especially from the perspective of the client, requires a high degree of trust and therefore generally a long-standing and deep relationship. All of the risk with this, on the surface, sits with the client but it does simplify things for both parties. One way to manage risk for the client is through the notice period or termination clauses in the contract to make it easy to end things relatively quickly if needed. Although you don’t need to negotiate fees for every individual project it’s still essential to agree multiple waypoints to review progress, helping to maintain oversight and ensure everyone remains incentivised to deliver promptly.

One disadvantage for the consultant is that the fee is generally paid in arrears (sometimes significantly) and requires invoicing. You need to be on top of your timesheets which adds administration and I’ve had to occasionally spend quite a bit of effort chasing for payments in some cases way beyond the agreed payment terms. Generally, however, it’s not been a problem for me, especially as it applies mostly to where an already very strong relationship exists.
2. The consultant’s effort

This is where the fee is agreed by both parties upfront. The initial quote is usually based on an effective day rate applied to an estimate of how much effort it will take to deliver the project, by the consultant, which is then negotiated with the client. This spreads risk between the parties – finishing quicker than you estimated can result in more upside for the consultant whereas the opposite is also possible (and in my experience more likely!) where you, as the consultant, end up putting in a lot more effort than anticipated. For my type of work, this has been the most common fee model I’ve experienced as it’s one of the simplest to understand and plan for and, in theory, shares risk more equitably.

The benefits are total clarity for both parties and also the fact that it forces you, as a consultant, to more carefully plan out the work in advance so you can make a more accurate estimate. Although the risk of how much is paid (or received) is lower, given the upfront agreement, there is still a risk as to whether the quality of the final deliverable will be worth the investment made, from both sides of course. This risk can be managed through specifying the expected deliverable very precisely in the contract but of course specifying everything is not always possible, every eventuality is not always foreseen and there is inevitably some room for interpretation. One advantage for the consultant is, once it’s agreed, you don’t have to worry so much about admin (except for internal accounting purposes) – you can just get on with doing as good a job as you can for the client.
3. The consultant’s performance

This is some form of performance-based fee dependent on the quality of the final deliverable, according to some pre-agreed assessment criteria. This is the model I found most interesting and so I experimented with it early on. It lowers the risk for the client because they get a say in how much they will pay for the work after it’s been delivered based on how well it has met their expectations. Of course, you need a defined way of measuring that in as objective a manner as possible. It does create significant risk for the consultant, but the advantage is it could be easier to convince a more hesitant client to go ahead with a project, a definite plus point particularly when you are starting out as a consultant without a big portfolio to show off. The way I managed the risk to myself was by having an agreed minimum and maximum fee and then incrementing between this based on the performance score out of 10, using agreed criteria. This guarantees you, as the consultant, a minimum amount to at least cover some of the effort you’ve put in. By setting these thresholds closer together or further apart, you control the degree to which the final fee is performance-based. Despite the advantage to the client, one bit of pushback I did have, in the case of using this for regular projects, is that it makes budgeting more challenging for them.

Initially I believed offering a performance-based fee was a sign of confidence by the consultant in the quality of their work. However, I’ve since come to believe it could equally be a sign of a lack of confidence because it creates allowance for disappointment in the finished product from the start and helps manage the risk you have with a fixed fee where the project could run and run until the client is happy with the result. So, I now believe a more confident consultant offers a competitive fee and is confident in their abilities to deliver to that and to win the work in the first place. However, I do believe there is a place for such a performance-based model, particularly when the project or deliverable is of a more innovative or experimental nature, as recognised by both client and consultant, and the risk is worth it for the consultant as it may create a new product or revenue stream they could replicate in the future.
What your approach to fee models says about your work more broadly

Of course, there are many other fee models possible, such as impact- or value-based models but I haven’t experienced those. Ultimately, whatever model is chosen, what matters is that there is a fair value exchange for both parties and that the work is delivered on-time and to a high standard, and one-size won’t fit all. But what you offer as a fee model does matter because it impacts the risk to both parties, the likelihood of an agreement being reached, the administration required and confidence in what will be delivered. I believe your approach, as a consultant, to fee models reflects on the approach you are likely to have with the work itself – are you customer-focused, flexible, innovative and confident? Don’t neglect this critical part of the customer experience in your holistic approach.