There are many different project contract types and fee structures that can be used by professional services. At BQE, we handle contract types for the A/E and professional services industries with our business management software, CORE. So, let’s look at the 12 contract types for professional services and when to use them.
These contract types are grouped into four major categories:
Hourly Not to Exceed
Recurring With Cap
When should you use it? When you agree with your client that you will get the job done for a fixed amount. Make sure you’re clear on the scope and where the line is, after which change orders will be needed.
Hourly Not to Exceed is a hybrid--hourly contracts combine with fixed contracts. You bill by the hour, up to a set limit. Many companies find that you might as well just go with a fixed fee--this way if you wind up getting the work done more efficiently, you reap the rewards. However, if the client is balking and you feel very confident that you can get it done in a few hours (without exceeding the cap), then this might make the difference between winning or not winning the contract.
Percentage is easiest to think of as a modified fixed fee contract. You base the fee on a percentage of a fixed contract amount. When should you use it? One easy example is if you have a contract to work on a home that was in a fire. Your normal contract amount for the rehab job is $100,000, but your client received an insurance settlement for only $75,000. So, you agree to work on a percentage, based on the settlement. Now you must increase employee utilization rates by 25% to retain the same profitability.
Recurring with Cap is just a fixed fee divided into even amounts. When should you use it? This is typically a cash flow play. This lets the client spread the payments out, so it’s less painful, and you have recurring cash flow.
All fixed fee contract types in CORE will track your billing, compared with the contract total. After your billing hits that ceiling, all billable time will be automatically marked non-billable. You can override these settings on a project-by-project basis if you need to.
Cost + Percentage
Cost + Fixed Fee
Hourly contracts have no fixed contract amount. You work, track the hours, and bill the hours. You can record a contract amount for reference in CORE, but if you choose hourly as the contract type, the contract amount has no implications, as it does with fixed fee contracts.
When should you use it? As much as this seems attractive like you’re covered because you get paid for the time you work, you could actually be losing money. As your company gets better at the work, and you get more efficient, it takes fewer hours to get the job done. Now you’re getting paid less while the deliverables have not changed. Clients are getting the same value. You are getting a cut in pay, for being good at your job.
Cost + Percentage is where you bill your cost plus a percentage of the costs as a progress bill. If the total contract amount is $1,000, and your fixed fee % is 10%, and the value of your billable time and expenses is $500, then you bill $50. $500 x 10%. The total bill would be $550. Your cost plus the 10% of your costs.
When should you use this? When you feel that the costs of a project are the major driver in terms of the work that needs to be done. This allows you to bill evenly based on how much of the total costs you’ve incurred to date (the value of the billable time and expenses).
Cost + Fixed Fee is just like Cost + Percentage but based on a fixed fee instead of a percentage. Most companies find the Cost + methods are overly complex.
Recurring + Expense
Recurring + Hourly
Recurring means you bill a fixed recurring amount, indefinitely, until the job gets done. When would you use this? This is your classic retainer type contract. Your clients pay a fixed, recurring amount, each month. It is also clear what they are getting from you each month, X number of videos, weekly calls, reports, etc. This is really a fixed fee contract on a recurring basis.
Recurring + Expense is a recurring contract, where you bill your expenses back to the client, over and above the agreed upon recurring contract amount. When should you use this? This is used in the same scenario as a recurring contract, but where you know you will have significant and unpredictable expenses associated with doing the work. Imagine if you were asked to speak at an industry event. This is the kind of contract you would use. It’s based on a daily fee, plus travel expenses. Then you would be at their disposal--as many talks or panels as they want you to participate in.
Recurring + Hourly is a fixed fee pricing model or plan with a cap on the number of hours. In these types of contracts, there is often a clause that says something like, 'up to 10 hours per month, plus $150/hour thereafter.' This is recurring plus hourly. When should you use this? Whenever you want to offer what looks like fixed fee pricing, but you want to hedge yourself against people taking advantage of you.
Oftentimes we start working on the project before it becomes a project. From taking the prospective client out to dinner to spending hours preparing a proposal, there may be significant time and expenses spent on a client before they ever become one. Using the marketing contract type on a project in CORE’s time tracking feature allows you to track exactly these sorts of things.
Overhead is how you can set up a project in order to track time and expenses spent on your own company. All your admin costs and anything you will never bill to or associate with a client can go into a project like this. It’s a great way to create a cost center, to track the costs needed to determine your burden rate.
You want to choose your contract types wisely. When using the best contract type for your professional services company, you can receive the most profits from your projects. CORE was designed for the A/E and professional services industries to make managing your company as easy as possible. With robust features that include project management, time and expense tracking, billing and invoicing, and HR, you can manage your projects in real-time and reap the rewards.