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Excerpt:
Question is: I am in Wisconsin and forming an agreement with a company interested in oursourcing some web design. I’d like to charge a flat fee per project. What is a fair percentage of the profit they make for me to ask for? 40%?

One answer was:
The key thing to remember is that the company you’re working with is a _client_, and you really need to introduce all the redundancies and safeguards into that relationship that you would any other.
That includes:

1) Making sure that, for any given project, you have the best possible idea upfront of what it’s going to cost you in time and expenses, and what a fair price for that service will be.

Just in case you’re still figuring this stuff out, the difference between what you charge a client, and what you effectively spend to get the work done is called the “margin” on that project. In general, for professional interactive services like designing, coding, production, etc., anything above 20-30% is doing pretty well. (I’ve run departments and accounts at very big agencies and very small agencies, and usually the margin goal was 15-20% in tough times, and higher in good times.)

Also, make sure you don’t undervalue your own work. When you calculate your margin on a project, take a fair estimate of the labor you’ll put into it, multiply it by your hourly market rate, and that’s your “cost” for your effort. _Don’t_ go upside-down on this, or you’ll sorely regret it. (”Upside-down” means take a loss.)

2) I’m not sure what you mean by “flat fee”…if you mean what it sounds like, that you’ll charge the same amount for every project, that’s a really bad idea unless all the projects are _exactly_ the same. (Like they’ve got a product catalog, and every new page they ask you to make is based on a rigid template.)

If you mean that you want to charge a “fixed cost”, where you guarantee them a price (within reason), up front, that’s not necessarily a bad idea at all. I prefer my projects that way, and price bids almost exclusively on a fixed-cost basis.

The caveat, of course, is that you have to have a very clear idea of when the actual costs, once the project is underway, are exceeding your estimated costs, and get the client to revisit the project scope. It doesn’t mean that you have to have a detailed booking system, but at the very least that you’re constantly checking the scope of what you’re doing against what you thought you would be doing, and alerting the client to any discrepancies as soon as possible.

This is basically an exercise in discipline and diplomacy. Clients don’t like to hear that they’re being unfair, and in a situation like yours, there’s almost certainly someone else they’ll be able to pin the blame on. That’s the risk of a fixed-price project, though–you’re almost guaranteed that _something_ is going to come up and challenge the agreed-upon scope, and it’s up to your abilities as a consultant and a diplomat to save your profit by either talking things back to the original scope, or expanding the budget in mid-project.

3) Finally, your cost shouldn’t have anything to do, really, with their own project budget, unless they’re really making an enormous profit off your back and not sharing it. Not only is everyone else right that they can easily just lie to you about the overall budget, their own internal margin, or whatever, but you don’t want to base your own economic success on their ability to negotiate a good margin, and then manage the project profitably.

Figure out what it’ll cost you to do it profitably, bid that amount, and manage the scope so it stays profitable.If you can keep it that simple, it’s not a bad business to be in.

This entry was posted on Friday, October 29th, 2004 at 9:42 am and is filed under Uncategorized. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.