Exceeding Project Hours Vs Underestimated Project Estimates
This post is inspired by a segment from the How and Why to Ditch Hourly Billing episode of the Freelancers’ Show. It’s a great episode that covers client risk, finding what they value, and positioning yourself as an expert. If you haven’t listened to it yet, queue it up on your iPhone and give it a listen.
During an episode of the Freelances’ Show Reuven Lerner mentioned his main reservation to switching to project-based pricing:
I’ve always been gun-shy about trying [project estimates] because I’m still worried that my estimates will be wrong and that I’ll end up doing tons of work for free.
Let’s imagine two scenarios:
An Estimate with Hours
You bill Hourly Hank at $100/hr. You’ve just used up the 200 hours you estimated for this project but you’re not done. You call Hank explaining that you’re late and he has to pay you for another 20 hours to get this thing finished.
A Project Estimate
On the other hand, you bill Project Paige $20k for the project. The project is behind schedule. You give Paige a call to apologize regarding being late on your delivery.
Which type of estimate is better?
Both scenarios suck because you’re delivering the client bad news.
The hourly case seems like the better choice because you’ll still get paid your hourly rate even though you missed the estimate. But is this really a net positive?
Let me tell you from experience, Hourly Hank isn’t going to be thrilled about having to pay for more hours. He’s going to go comb through every invoice looking for areas of wasted time and money. You’ll both play a blame game as to why things are late. Both you AND Hank will walk away from the project feeling like you got screwed. There is no way Hank will ever serve as a referral.
In Paige’s case she’ll be upset that you’re late but you’re not throwing gasoline on the bad news by asking for more money. In fact, she’ll be impressed that you stuck by your word. That you claimed financial responsibility for a bad estimate. Paige will tell people that you did everything you could to make sure she was taken cared of.
But I’d Still be Doing Work for Free
This isn’t 100% true. What actually is happening is your effective hourly rate is going down.
In Paige’s case you charged $20k. Your effective hourly rate changes based on the actual hours you worked.
- If you worked 200 hours then your effective hourly rate is $100/hr.
- If you worked 180 hours then your effective hourly rate is around $111/hr.
- If you worked 220 hours then your effective hourly rate is around $90/hr.
The 180 hours worked scenario reveals a very compelling benefit: if you overestimate the amount of time it’ll take, your effective hourly rate goes up!
You’re the Expert
Plus, you’re not really doing “free work” you’re claiming responsibility. Your client had to come up with a budget for the project. They trusted you to come up with an estimate. As Jonathan Stark stated on the Freelancers’ Show this conveys to the client:
I’m an expert. I know how long this is going to take and if I’m wrong, that’s my fault, not yours.
How about you? Are there other reservations you have to switching away from hourly? Leave a comment below and we’ll address those reservations together.