Learning Why Flat Fee Projects Rule

Learning Why Flat Fee Projects Rule - - Lessons Learned, Episode 39

We all do projects. And for many IT companies, projects are the most profitable thing they do outside of recurring revenue. Like everything else, it takes time to develop a project process that's guaranteed successful and guaranteed profitable.

When I first moved into the SMB IT market, I had the same experience over and over with new clients:

• Someone had sold them "a system" (Windows or Novell server)
• It had minimal or no documentation or instructions for the client
• It had never been maintained
• Fifty percent of the time, the backup was not working. See Episode 8.

In other words . . . the norm in the SMB market was to sell a bunch of hardware and software, make a lot of money on the setup, and then walk away and look for the next big job. It was easy for me to offer ongoing monthly maintenance (paid by the hour). Then I had those clients for fifteen or twenty years.

When I was asked to quote a project, I drew on my experience being the buyer of these servers in my former life. I knew the client wanted certainty. So I quoted a job with detailed specs and I guaranteed the cost if they signed by the end of the month. That worked well.

Over time, I realized that I could give the client all the details on the job specs without breaking down all the details on the labor. Labor was labor. No one wanted the desktops set up but not connected to the network. No one paid for a server to be set up but not configured for their needs.

So, I started quoting a "lump sum" for the labor component. To be honest, if you want me detailed process on quoting projects, see the book, Project Management in Small Business - https://projectmanagementsmb.com/. 

One day, I was in my peer group meeting and someone threw out the question, "What do you charge for a network migration?" One guy immediately said, $2,500.

But what if it's complicated ... His response: $2,500.

Ten users? $2,500.

Thirty users? $2,500.

Two servers? $2,500.

He point was: The core piece of the migration would always be a predictable price. Of course that's higher today. But the core elements of the migration are the same. Maybe even easier and more profitable today. 

He then had to give a separate flat-fee quote for additional labor based on the specifics of the job. But he, his sales person, and his service manager all knew exactly what's included in the core piece of the migration.

I didn't adopt that exactly. But it sold me on never doing a "time and materials" project again. Every quote would have two simple numbers: One for hardware and software, with minimal detail. And one for labor. I break this down inside my system, but the client never sees it. 

Getting It Right

If you get the calculations wrong, you will lose money or break even. Neither of those things should ever happen. But how do you get it right? Short answer: Experience.

Critical to all of this is that you need to break the project down (internally) into stages or steps and track your time for each stage. Over time, you will have hard numbers of how long it takes to set up a new desktop and laptop, how long it takes to configure a firewall, how long it takes to migrate mailboxes, and so forth.

Think about getting a quote from the car dealership for any work. They have a big book full of bar codes. Remove and Replace bumper - beep. Paint bumper - beep. And when they're done scanning all the pieces, there's a price.

Of course, you can round that up a bit for project management, or down a bit to a nice number like $9,999. But you'll be in the ballpark. Then two things have to happen, both of which I've alluded to.

First, you need to track all of your time, and your technicians' time by stage. The easiest way to do this is by creating one ticket per stage and really pushing everyone to make sure they put their time in the right place.

Second, over time, you will automate processes you can and you'll get better at all of the work you repeat over time. So, you will naturally make move money over time from your projects. Most importantly, this does not change the price the client pays!

If the client buys a project with a flat fee of $5,000 for labor, then they agree that that's the value they expect from the project. If you are able to reduce your cost of delivery over time, the client is still getting $5,000 worth of value from your services. Do not change the price. Be happy to make more money.

As with all things, go slow, implement one step at a time, document everything, and calculate your profit after every project. With every project you will have more information that will help you make future projects more profitable.

Focus on the value, not the price.

All comments welcome.

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Episode 39

This Episode is part of the ongoing Lessons Learned series. For all the information, and an index of Lessons Learned episodes, go to the Lessons Learned Page. https://blog.smallbizthoughts.com/p/lessons-learned-blog-series.html

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