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Hourly vs. Fixed-Fee Billing: What is the Difference?
May 8, 2018
Everyone loves talking about money, right?
No? Discussing money is something it seems no one likes doing. For whatever reason, our culture isn’t really set up for it. From discussing project budgets to how we bill, there hasn’t been a client who is eager to discuss money.
So in lieu of discussing it, I’m going to write about it so you can read this in the dark without anyone knowing. Isn’t that kind of me?
When discussing money, one of the questions that comes up is how we bill. I’ve written before about how much an architect can cost to design a remodel (which certainly still applies, but different numbers get plugged in there now that we have interior design and landscape architecture available as services), but I haven’t really written about how we bill.
How do architecture and design firms bill for their services?
Without a full background about why, you should know that there are really three major ways that architects bill: hourly, fixed-fee, and as a percentage of construction.
At Board & Vellum, billing based on a percentage of construction cost is something we generally avoid except in rare circumstances, so let’s focus on the difference between hourly and fixed-fee models, and why one or the other might be more appropriate for your project.
With an hourly billing model, we bill you for every quarter hour we work on your project with rates that vary per person. Each person’s hourly rate is determined by that staff person’s role on your project, their level of experience, and sometimes the particular task that we are working on.
We usually give you an estimate of what we think our fee range will be, but those estimates, at least in our office, are not a limit. They’re provided for planning purposes and represent our professional opinion of how long we expect it will take. For some tasks, when an estimate can’t be reasonably determined, we will just bill hourly.
Hourly is a great model when you know you’re decisive and can make decisions quickly. It is also often better for our team when you know you’re not decisive and may need to work through a complicated design and your thought process. Schematic Design is the phase that is most often done as hourly as there are so many unknown factors during this early creative phase.
Our invoices will include a full breakdown of every hour we worked and what we did. Some people love looking at this detail. Others get overwhelmed and get caught up imagining, “Did that task really take two hours?”
Those sorts of questions are challenging because, a) we are honest with our billings, b) if we did make a mistake, then it reduces trust between us, and c) there’s no way that you can truly understand how long something should take, which can create frustration on your part. So, know your comfort level if you go into this sort of arrangement.
The thing to remember when working with hourly billings is that design is not a linear process. We will often explore numerous ideas that end up being dead-ends, but they have to be explored in order to leave the path forward clear. Those explorations are part of the design process: just because they didn’t turn out doesn’t mean they aren’t valuable and aren’t billed. If we were to take one perfect step, immediately followed by the next until we created a perfect design, we’d be accountants and not designers. If you want an accountant to design your project you might be reading the wrong blog!
In a fixed-fee billing model, we look at an estimate of what we think the work will take in terms of time, assign an hourly rate to it (which you never see), and then add a cushion factor to it, thereby coming up with the fixed fee to do the work.
We’ll quantify the scope (number of meetings, drawings produced, rounds of revision, etc.), you’ll agree to the price, and that’s that. There’s no review of our hours on an invoice and no real risk that you’ll pay more than the agreed-to price, as long as you stay within the scope of service. (And we will tell you if you are asking for something out-of-scope.)
The pros of this, are that you have control over the budget. It is on us to beat our own internal target to ensure that we make our profit goal. (Our goal is around 15%, which I’ve written about before when discussing our benefits.) This means that we are likely somewhat conservative in our estimate of fees for a fixed-fee project to ensure we don’t lose money on it. That estimate, however, is still likely going to be below our high-end hourly range.
Fixed fees are best for people who just want certainty in what they are paying. It means they can stay focused on the design work and not how long each sketch took to create. It also means, however, that there’s no benefit (aside from time, which is always a benefit) from making quick decisions.
Do designers have a preference? Should a client have a preference?
What fee model do we prefer?
In the end, there’s no magic answer to this. We still track our time in the same way, no matter which way we bill. It really comes down to what you prefer. Most of our fees are billed hourly, but we have recently found that some clients want the certainty of a fixed fee, and so we allow clients to convert any hourly model to a fixed fee model. Typically, that number is some number between the low and high end of the hourly estimate. The more unknowns, the higher that number will be.
What fee model should you prefer?
Remember, talking about money is something everyone hates. Nonetheless, you need to talk about it. Be honest with yourself about your comfort level and how trusting you are. We’re always happy to talk with you about the pros and cons of each model and even to structure each phase of the project differently. In the end, we realize our clients are all different, and we can work with you to create a billing model that works with your considerations, and helps to deliver a beautiful design in a model that makes the most sense for you.