In the service industry it is common to approach a project like this:
Agree the scope of a project
The contractor gives an estimate on how long the work is likely to take
Contractor starts working and sends weekly or monthly invoices.
While this practice is very common, it is also very wrong.
I would even go as far as saying: Any contractor who does that is an amateur.
So what is wrong with estimates and subsequent time-based billing?
More specifically, from the perspective of the customer:
The contractor is not incentivised to finish the project on time. In fact,
it is even worse, it is in the interest of the contractor to delay the project
because he/she is paid by the hour and not by the amount of completed work.
The risk is squarely with the customer. If the customer is given an estimate,
there is no way of knowing, how much a project is actually going to cost.
Many IT projects overrun their schedule and the customer bears the consequences.
The contractor is disadvantaged by the arrangement as well:
Most contractors are hard-working, honest people. But if a contractor finishes a
project in half the time because he has learned to be efficient over the years,
he/she is actually punished because only the time spent is charged. There is
no incentive at all to look at better tools or learn new things to get the work done
When a project overruns the estimate, the contractor has to have an awkward conversation
with the client. Trust is eroded and basically everyone loses.
That is why professional contractors take the risk of project overruns upon themselves.
They provide a guaranteed fixed price in advance. If the project takes longer than expected,
the contractor is incentivised to learn from the mistake and to avoid it going forward.
The main advantages of fixed price projects are:
The customer carries less risk. The project will cost the pre-agreed amount of money and no more.
The contractor is incentivised to be efficient and do a great job in the planned amount of time.
There is no awkwardness and re-negotiation and hence no erosion of trust.
If you are looking to get an IT project done, prefer a contractor or agency that provides a
fixed price quote.
If you are a contractor who charges by the hour, stop it now.
Web & Mobile Engineer, Founder, Lean Startup Enthusiast.