Get the guide on which contract types you need depending on your consulting services or type of project. Learn the big 4 and their pros and cons now! [Updated]
Taking care of the cash flow is crucial for your business’ success. However, it can get a bit complicated when the company grows, and there are multiple employees and subcontractors working on various projects with different clients.
There are many ways to charge for your consultancy work, and yet almost each consultant-client relationship is unique, requiring a special treatment when the time for invoicing comes. Keeping an overview of your contract agreements helps you better organise work, cover the costs and make sure there is a profit in there for the company.
4 standard ways to charge for your consultancy work
There are many more variations of them but most can fit into one of the following frames:
1. Time and material based invoicing
If you and your client agree upon time and material based invoicing, you multiply the number of hours spent on the tasks with the hourly rate and add the costs of the materials you use. If multiple people are working on the project, the hourly rates may vary and you must keep track of all of them. You usually calculate the internal cost (hours and materials spent) at the end of each month and charge it to your customer
- The downsides: It may be hard to organise work, if you cannot predict the exact number of hours you will spend on the client’s tasks. This is also usually a non-binding agreement, so you cannot count on a steady cash flow.
- The upsides: Usually, you do not have to predict the cost in advance, which means you avoid undercharging. The time you have spent is the time you charge. Also, it might be a good start of a long-lasting relationship with the client.
2. Pre-paid hours
This type of contract allows clients to buy and pay for a pool of working time and material in advance. Usually, the pre-paid hours are spent on smaller tasks, like fixes and phone or e-mail consultancies. When they get spent, clients usually buy a new batch. They might expect some sort of discount or advantage in the schedule.
- The downsides: If you have different hourly rates for various profiles in your company (junior and senior consultants), you might experience some trouble balancing them in the pre-paid hours contract. Clients might also expect some advantage in the schedule, therefore you should plan for some jump-ins when organising work.
- The upsides: You receive the money in advance.
3. Projects based on fixed price
If a customer employs your consultancy services for a fixed price project, you have to estimate the number of hours you and your team will spend on it, the cost of materials you will use, and the cost of all the subcontractors you will work with. The best way to do this is to look for similar projects or bundles of tasks in your time tracking system and consult the team members for the time estimate. Set up a payment plan, if the project lasts longer.
You may request part of the payment before and during the project work with final invoicing upon project completion. Do not be shy to limit the scope and charge for any additional work.
- The downsides: You have to estimate the accurate cost in advance and set up a fixed price for the project. This requires you to understand the project down to every detail, have a very good judgement of your own efficiency, and know the client very well. If the project gets out of hand due to additional requests, misunderstandings or delays, your costs may rocket and you can quickly find yourself with a low hourly rate or even lose money.
- The upsides: Organising your work will be easier, if your time estimate is accurate. You will learn this through experience, so do not despair, if you undercharge a bit on the first few projects. If you and your team track time spent on the tasks, you will have valuable information for your next negotiation. Also, the cash flow is more predictable.
When it comes to projects based on fixed price, do not be shy to limit the scope and charge for any additional work.
If your client requires your services on a regular basis, a retainer might be the best way to establish the business relationship. They can rely on you to provide them the service they need, and you can rely on a steady cash flow for the duration of the contract. Based on the time tracking data you will be able to accurately estimate the time and costs you will spend on the client’s tasks, and charge them on the monthly basis. But do not get too comfortable and keep an eye out for possible deviations. Let the client know you will have to charge for all the tasks that are not part of the retainer, or agree to balance the months when you spend less time with the months you get a bit busier.
- The downsides: Sometimes you might spend a bit more time and materials than agreed in the retainer contract. Make sure the client understands what they were for and charge or balance them in the next invoice. Clients may also expect some discount for signing a retainer. First, you should cover all your costs and only then consider obliging them.
- The upsides: Retainer is the best way to ensure steady work and money for your company. Usually, it is a sign of trust between the consultant and the client, so you are on a good way to get some project work too.
In 2020 and 2021 we see more companies moving towards subscription based business models like retainers.
Time tracking is essential for all consultancy work
No matter what kind of service contract you agree upon with your client, keeping accurate track of time is very important. It helps you control your resources, estimate costs on future projects and see a red flag when things spill over the agreed scope of work.
TimeLog covers all the standard ways of invoicing and even more complex variations you might agree upon with your clients. Project invoicing is completely automated. It allows you to keep track of the time you and your team spend on tasks, and it also gives you an overview of all the planned fixed price payments in a given time period. It supports your work processes and helps you control your finances, while assessing and focusing on the most profitable projects, invoicing and customers.
Did you know TimeLog supports 8 different types of contracts to give you full control over the invoicing process. Mix contracts and maximize profit margins now.