Web Design Agency Billing Practices: Recommendations
September 7th, 2012 by Chris Olberding
We work in an incredible industry. We have the enviable jobs of being super nerds, infusing the world with our creative energies and clever solutions and getting paid to do it. But it’s that last point that can oftentimes be the source of much frustration for many web professionals who have the joy of managing the business side of web design and development.
Dealing with the billing process can be a pain. The idea of it is simple enough. You do work. You bill for that work. You (hopefully) get paid. The process however is another story, with many possible points of contention along the way: establishing client expectations, staying on top of the project scope, maintaining high quality of work, working with and around every type of personality or organization, all the while ensuring you are actually making money. When I talk to other designers and agency owners about their own billing frustrations, the conversation typically revolves around those issues.
I believe many of the points above are a direct product of or at least exacerbated by working within a faulty billing system.
There are three significant approaches to billing design services:
- Value-based billing – Billing according to the perceived value of the work provided to the client, unrestricted by the amount of actual time spent on the job.
- Fixed-bid billing – Billing based on a concrete quote for the scope of work provided by the client, agreed upon at the beginning of the job.
- Time-based billing – Billing based upon actual time spent on the job, billed in time increments and by an hourly rate.
Right off the bat, I’ll tell you that within Station Four, we bill based on time, for many good reasons. But I also have past experience with value based and fixed bid, so I can attest to the many allures and pitfalls you will find with those two options. Working within the practice of billing according to actual time opposed to value or a fixed bid allows you, as a web professional, to ensure a smooth creative process and the output of quality work that will ultimately make you money and keep your clients smiling. Two of the best things we could ask for in this business, right?
Not quite convinced? Let me take some of the leg work out of it.
Ah, the holy grail of charging for design. Proponents of this practice assert that we should bill in proportion to the amount of value our work provides the client and not be bound by the amount of time we spend in Illustrator. This type of reasoning is most commonly applied to design, specifically branding, but can be extended to development as well. There are certainly some benefits to going in this direction:
- The creative process is not linear, but takes place in fits and starts. It meanders, working between different concepts, until BOOM, inspiration strikes you in bed at 2am! Much of the time spent thinking and brainstorming doesn’t occur in the strict confines of the 9-5 while you’re at your desk with the timer running, therefore value-based billing can help ensure you are being fairly compensated for your real effort.
- The minutes and hours spent in production don’t provide compensation for the years of study and experience that went into the designer’s ability to quickly discern the best solution – as Paula Scher famously described her napkin sketch of the new Citi logo: “It’s a second done in 34 years.”
- Being compensated according to value or performance helps align incentives to produce the successful work.
- It is only fair that you should be proportionally compensated if you create something that generates a ton of revenue.
I’ll concede that many of the arguments above have valid points. However, the problem with value-based billing is in application and in the fact that the true value of a creative endeavor cannot be known beforehand. This leads to a number of problems:
- Isolating value: In the majority of cases, it is difficult to isolate the value of the design from other factors such as marketing efforts, copywriting, sales process and historical performance.
- Measuring value: In many cases, there is no reliable way to measure or assign a monetary amount to the value the design provides.
- Depending on a whole lot of trust…or lawyers: Even if you could isolate and measure the value of your design, you are now forced to be informal or formal business partners with each of your clients to ensure that they are providing the correct compensation. Additionally, if your client happens to make poor business decisions that fail to capitalize on the potential value of your work, you would be out income through no fault of your own.
- Scaling difficulty: Even for a small agency, the administrative overhead seems prohibitively high, when considering the potential value of your work in widely disparate industries, the pre-sale contractual framework and the value-based payments after the fact. Perhaps this is part of the reason that I’ve only seen freelance branding specialists seriously promote this practice.
Fixed-bid Billing, A Common Billing Pitfall for Web Designers
Providing fixed-bids is one of the more common ways in which freelancers and less experienced agencies work. Even at my agency, Station Four, we effectively provided fixed-bids in the early years of operation. However, fixed-bid billing isn’t as plain and simple as just coming up with a number. It gets further complicated when the actual work does not match the original scope of the project laid out in the proposal or contract. Modifications must be handled by the submission and approval of change orders. Regardless of how much time the designer spends on a project, the client will not be billed in excess of the original quote without the approval of a change order.
While I believe that, in most cases, providing fixed-bids is a quick way to be unprofitable, obviously there are reasons why people use them:
- Clients prefer them: In most cases, clients prefer a concrete number to an estimate.
- Flexibility to adjust prices on the fly: You are free to bid what you think the client can pay. This can help get work in the door from small clients, even if it will likely be unprofitable. It can also make it easy to pad your quote when you get a call from a Fortune 500 corporation.
- No discipline needed: If you don’t track your time, then there’s really no other way to go about it–throw out a number, do the work, get paid, hope that you made money.
- No risk of coming in under budget: Typically a fixed-bid works both ways; you’re going to expect full payment of the approved bid whether you come in over or under budget.
- Required by some of the big guys: Typically proposals in response to RFPs expect a fixed-bid, as do most government projects and some larger corporations due to their particular accounting/requisition procedures.
Problems with Fixed-Bid Contracts
Estimates: Even in ideal situations, accurate estimates, either in the initial proposal or in subsequent change orders, are difficult to produce. However, most circumstances are not ideal:
- Clients typically don’t have the experience or internal resources to provide complete project scope documentation on the onset of the project.
- During the pre-sales process, it is difficult to take into account the effect the personalities and politics of the client’s team will have on the project.
- It is common that a project needs to change direction due to environmental factors, like a competitor launching a new project, or internal factors, such as a change in direction.
- Design and development projects are inherently creative endeavors, requiring inspiration, exploration, and experimentation—just because something took you 16 hours the last time, doesn’t mean it won’t take you 32 this time.
Therefore, the true scope of a project is unlikely to be known at the time you are required to provide a quote or estimate for a project.
Proposals and Production: Fixed-bid billing forces you to create proposals that are as detailed as possible. The problem here is that there are certain design or content areas that are heavily dependent upon the strategy, user experience, and direction that have not yet been established for the project. There are a significant number of grey areas that are difficult or impossible to precisely stipulate in a contract. And if you were able to do that you are essentially boxing yourself into an inflexible project that couldn’t take advantage of strategic insights that occurred after the project got started.
Administrative Costs: If you submit a fixed-bid quote and are still determined to keep the project in the black, it is likely you will be forced to into the role of “scope police.” This involves vigilant oversight of the day-to-day discussions and decision making, while keeping your hand on the break in case the project veers out of scope. It involves standing firm and hoping you have a watertight proposal or contract when a client complains that they thought their request was part of the initial project. And, more often than not, it involves making tough choices between a happy client and making money.
Negative Incentives: There are good clients and bad clients, and then there are sales people. Given that one big underlying goal is to increase sales, it’s no surprise that sales staff is commonly involved in a client’s project team. Because of this, they will find every way to keep the price as low as possible. And in a fixed-bid contract, you’re a sitting target – you’ve agreed to a price before doing the work.
You’ve given the client every incentive to push as much work as you’re willing to do without charging them more. Additionally, if you go ahead and perform the work prior to approval of a change order, they can dispute it and see if you will drop it. This is just the salesman personality—I’ve literally had clients tell me that no matter how good the price they’re quoted, they’ll still try to talk it down. On the other side, when a project becomes unprofitable, a designer or agency has the tendency to develop a “just get it done” mentality, which doesn’t lend itself to quality work or a very thorough QA process.
Time-Based Billing: Benefits, Process, Tools, and Tips
So now that I’ve laid out some of the primary issues with fixed-bid and value-based billing strategies, let’s look at the benefits of time-based billing and how it addresses some of the issues with the other billing methods:
- Reduces need for full project specification: With time-based billing, proposal are merely a communication tool. You don’t need to cover every little aspect of the project. Of course you need to communicate your recommended approach and provide a responsible estimate so that the client can budget appropriately.
- Reduces importance and preparation time of proposals: An extension of the first point, if the proposal is not some big monolithic document, then you don’t need to spend hours on it.
- Helps determine what your hourly rate really should be: One of the last fixed-bid projects we worked on was a mess. Even with multiple change orders, we were getting pushed around and losing money. At the end of the project I ran the numbers. Total revenue divided by total number of hours spent on the project came out to $60/hour—about half of what our rate was “supposed” to be. If you are performing client work that isn’t being compensated, it’s going to be hard to figure out what your actual hourly rate should be to keep your business afloat.
- Ensures profitability: If you’ve calculated your hourly rate correctly, then each minute you’re working on a project you’re in the black and making money.
- Produces great and easy to consume metrics for your business: Now that a billable hour is truly a billable hour, numbers matter and you can figure out what percent of your time is being billed. Based on your business’ break-even point for the year, you can set weekly or monthly targets for billable hours.
- Cash Flow: Billing for your time lends itself to sending regular invoices to your clients and, in my experience, greatly improves cash flow. Invoicing clients based on the completion of project milestones can potentially tie up thousands of dollars or more that we wouldn’t see until the client fulfilled whatever obligation we were waiting on. Now, if we’re nearing the completion of a project, we’ve already received payment for the bulk of the project.
Eliminating the Perceived Drawback: Assuring Clients through Proper Process
The drawback to time-based billing is that some clients might be uneasy at the prospect of opening their checkbook without concretely knowing how much they’re on the hook for. I feel the solution to engender the potential client’s trust is by demonstrating professionalism and emphasizing communication. This can be done with a variety of tools:
- Contract: It is wise to communicate your billing practices and the frequency of your billing periods to your clients upfront in non-legalese. When we begin work with a new client, we have a policy guide that outlines our policies and procedures in plain English that the client signs in addition to a more formal contract. Unless we make major changes to our contract, this will be the only contract a client will sign. The contract is not project specific and applies to any current and future work we might perform for the client. Estimates are provided in the form of work orders, which reiterate that they are strictly estimates and that the client will be billed for actual time.
- Time Tracking: This should go without saying, but if you’re going to bill clients for your time, it is imperative to be meticulous in tracking your time and writing detailed notes for each entry. I recommend providing clients itemized invoices as this legitimizes that you are billing only for the time you worked on the project and allows for a good reference if there is a dispute.
- Budget Reports: Even though we do not provide fixed-bids, we do provide estimates and use those as the basis for establishing a budget. Different clients have different sensitivity to budget overruns, and so our approach to monitoring budgets has to reflect this sensitivity. I recommend weekly reports as monthly reports are too infrequent to catch overages. If the clock is going to be running, clients are right to want constant feedback on the status of the budget. It’s important to provide frequent reporting so that if and when things veer off target, it is caught early and adjustments can be made quickly.
The above three tools are probably the most vital when working within time-based billing. But it is also important to establish trust before the process even begins. One of the best ways to do that is through great references. Almost nothing you can do can sell you better than client references. As it pertains to this article, having client references that you’ve worked with on a time and materials basis (and come in at or under budget) is important.
Another selling point is your body of work. At the end of the day, clients are talking to you because they like your work. One way to make billing practices less of a sticking point is to demonstrate great work. Having well-known clients doesn’t hurt either.
Motivation: Do Good Work and Get Paid
We have covered a lot of ground here, but we can boil it down into a few takeaways:
- Designers should charge according to the time they spend performing services for their clients.
- In most cases, charging according to value, while appealing, is not practical.
- Charging a flat rate or through a fixed quote requires very accurate estimates.
- Even in ideal circumstances, it is difficult to estimate the time required for any but the smallest of projects with a high degree of accuracy.
- Providing fixed bid quotes increases administrative costs and overhead by necessitating higher requirements for project and scope management both before and during the project.
- Providing fixed bid quotes creates negative incentives for clients to be pushy and the production of subpar output.
- Billing for hours worked in regular intervals improves cash flow.
- Time-based billing has a higher chance of producing great work and happy clients.
As the owner of a design agency, my primary professional motivations boil down to doing good work and running a profitable business. While the two do not lie on a continuum or run diametrically opposed to one another, as long as one of the two are being met, I’m probably not going to be totally despondent and hating life. At the very least, billing for your time ensures profitability and reduces the likelihood of having to argue over money with clients. Moreover, in my experience, knowing that the clock is always running tends to discourage clients from constant indecision and wasting your time—you’re a professional, so charge like one. There are many things I do as a business owner that I enjoy, arguing with clients over money and the fine points of a contract are certainly not one of them.
Billing your time solves a number of common problems on the business of design; it essentially solves problems associated with scope-creep and ensures profitability of each and every project. Time-based billing cuts out a lot of unnecessary stress. It allows you to keep structure and accountability within your work, so that creativity and collaboration can thrive.