- January 23rd, 2013
- 52 Comments
For most creative professionals, this story is a familiar one: A client reaches out to you. They need a name, or a logo, or a website, or an app. Actually, they need it all together, and they need it all in a month — well, maybe a month and a half. The initial meetings go well, and they get you a signed contract and a deposit ASAP. You’re ready to start, and your schedule is clear for the next six weeks. And then you get the call.
“We won’t have the content you requested ready for another month.”
“Oh no,” you think. You were actually counting on that second half to pay your rent next month.
Take Control Of Your Finances
You may not be a sole proprietor. Perhaps you run a small boutique firm, or a large ad agency. Even if that’s the case, we all have similar problems: how do we pay our fixed expenses without knowing for sure when we’ll get paid by our clients?
Cash flow is the single most important thing for your business. Without money to pay rent and bills, the business will quickly spiral into Chapter 11. And if you’re a sole proprietor, the stakes are even higher: getting evicted from your office for a late payment is one thing, but if your business is run from a home office, you face the very real prospect of being homeless.
How We Usually Deal With The Cash Flow Problem
The most common way of dealing with uncertain revenue is to start with a lot of money in the bank, or enough credit to take out a loan if necessary. Angel investors1, friends and family can help with the former. As designers and developers, we can also create things that bring us passive revenue, although that can become a full-time job in itself2 — and not necessarily a lucrative one.
Different billing practices require different approaches to ensure cash flow. Some of us charge hourly, while others do fixed per-project fees. The former need to estimate as accurately as possible in order to book enough hours to pay the bills, and some of them end up “churning3,” or billing extra hours even if no substantial work is done. The latter must base their estimates on the assumption that every job will take the maximum amount of time possible, and try to work as efficiently as possible.
There’s a serious problem with both of these approaches, however: jobs almost always occupy more of our schedule than we expected.
Delays Cost Money
If the client says they’ll get something to us by Monday, more often than not it will arrive Wednesday, or Friday, or maybe even the following Monday. People are imperfect, and unsurprisingly, our clients have dozens of concerns in addition to our work for them.
We normally deal with this by agreeing to delay the date of the final product by an equivalent number of working days. But what happens when something gets delayed for a month, or two months, or six? We can’t reserve our time for one client indefinitely.
Unfortunately, most work-for-hire contracts do not contain explicit protections against client delays. The AIGA’s “Standard Form of Agreement for Design Services4” notes this, but offers little in the way of guidance [emphasis is mine]:
“The danger for you as a businessperson is that an unexpected delay could mean that you’re temporarily unable to produce billable hours. To offset this risk, some creative firms attempt to charge a delay penalty or a restart fee. You may want to raise this issue as a negotiating point. However, most clients are not very receptive to the idea.”
Clients are understandably less than thrilled at the idea of paying to stop work. But that doesn’t mean we can’t protect ourselves against this risk while being up front and fair with our clients.
How To Negotiate A Better Contract
Contract negotiation is extremely difficult. Successful negotiation requires both keen insight into the other party’s needs and desires, as well as an understanding of all of the options available. The best negotiators are also experts at “logrolling5“, i.e. trading assets in a negotiation in order to create more value for both parties.
Your initial discussion with a client will set the tone for all of your future negotiations. These talks will inevitably converge on one of two questions.
1. We Want X. How Much Will It Cost?
Anyone who’s ever used a home repair service will tell you to bring in a few people to get estimates before deciding on a contractor. Because we work in a service industry, we should expect the same treatment:
“How much for a website?”
“…What about just a logo?”
Most of our clients have no idea what to spend, for the same reason that we have no idea what to spend on a new roof: we’ve never built a house ourselves. Estimating construction costs is not in our skill set. These questions are the client’s way of sussing out our cost structure.
2. We Have $X. What Can We Get?
In government organizations and academic institutions, money is often earmarked before anyone knows what it will be spent on. Budgets are set aside for “IT”, “marketing” or “advertising”, and the client will have a price ceiling. This doesn’t mean they won’t try to get the best deal — just that they have a limit to their budget that may be less than you’re willing to accept.
Both of the questions above are based on the assumption that creative work can be delivered at a fixed cost. But in practice, each job is a unique problem and takes a variable amount of time to solve. What if, rather than pretending we know exactly what each job will cost, we embraced uncertainty and moved on?
Changing The Conversation
A wise man6 once said, “If you don’t like what’s being said, change the conversation.” In order for us to protect ourselves and our clients from the inevitable project delays, it helps to finish the initial consultation with a brief chat about our “terms of service.”
Below are my terms for mobile software development. They may inspire you to change your own contract. But whatever your terms look like, make sure they are clear and that you apply them consistently. Writing a Plain English explainer can help quite a bit with this.
Agile Billing Cycles
Instead of worrying about working enough hours or booking enough fixed-bid assignments for the year to pay our bills, we can choose to bill on a weekly, bi-weekly or monthly cycle. The system is based on scrum sprints7: two- or four-week blocks of work during which a predetermined set of software features are implemented.
Agile billing addresses the concerns of both clients. Those with a fixed budget know they’ll get all the work their money can buy, and those without one know they won’t pay for more work than necessary. And when a client asks “How much?,” you can give them a range based on how many cycles a project of that size normally takes. If they need a firm number, you’ll need to work out a list of user stories8 or wireframes with them to determine a fuzzy estimate of how many sprints will be necessary (I use Pivotal Tracker9 for this).
Cycles are scheduled in much the same way as a magazine ad or sponsorship: weeks are blocked out and purchased in advance. During each cycle, we set aside a certain number of hours per day, part time, during which we make ourselves available to the client. It’s best to keep this to around four to five hours per day, which allows for both administrative overhead and a slight overlap between clients in case a job takes longer than expected. Explicitly limiting availability also prevents last-minute “marathon” sessions, which detract from the end product (and our sanity).
The 20- to 25-hour work week has another important benefit: it enables us to serve a limited number of additional clients on monthly retainers with a much lower time commitment. If a client is unsure about their start date, we can offer to add them to our monthly schedule until they figure it out.
Calling “Time Out”
There’s a big challenge when working on time-based billing cycles, however: clients often shy away from them, because if things take longer than expected, they end up paying for the difference.
Fortunately, we can address their concerns while protecting ourselves from too much exposure. We can allow the client to place a temporary stop-work order one day per week if something on their end takes longer than expected, and then we add those days to the end of the contract if necessary to complete work. This ensures that the client doesn’t shoulder any extra cost in the event of reasonable delays, while protecting our schedule from too much overlap.
Holds, Cancellations and Uncertain Start Dates
Sometimes a project gets cancelled or put on hold. In a “half-up-front, half-on-completion” scenario, mid-project cancellations can cause considerable friction if they happen early and the client feels they are owed some portion of the deposit back.
Agile billing deals with this by allowing clients to cancel a cycle in advance with a variable kill fee depending on how much notice they give. For example, one might allow a client to cancel a two-week cycle one week in advance at a cost of 25%, or up to three days in advance by paying 50%.
In addition, sometimes clients know what they want but aren’t sure exactly when they’ll be able to begin. In these cases, rather than provide free consulting services while they figure out how to proceed, we can offer to add them to our monthly retainer schedule and, in the meantime, assist them in the process with a smaller, more flexible time commitment.
How Much Per Week?
How much you charge per week will depend on multiple factors, including what the market will bear, your own costs, and what your competitors charge for similar services.
How Much Do You Want To Make?
While you should never compete solely on price, talk to a few of your colleagues who freelance to get a sense of what they bill clients. Multiply their hourly rate by around 1000 billable hours per year to get a sense of how much a typical freelance professional in your area bills per annum if they’re booked solid. (If you’re not a sole proprietor, multiply your colleagues’ agency rates accordingly.)
Once you have some realistic figures for comparison, decide how much profit you want to make per year, add your expenses, multiply the sum by 1.5 to account for holidays and low seasons, and divide by 50 to get your weekly rate. If you find that the hourly rate works out to double that of your colleagues’, you may need to revisit your salary expectations or slash some of your expenses.
Most of us are naturally shy about discussing money. But we are professionals, and we merit the same level of financial stability as any other professional. Don’t be afraid to ask for a reasonable billing agreement that guarantees cash flow for you. Your clients, your business and your users will be better off because of it.
- Design Is a Job12, Mike Monteiro
Monteiro breaks down budgeting, client relations and professional conduct in a well-written, acerbic tract on the business of design.
- Negotiation Genius13, Deepak Malhotra and Max Bazerman
Two Harvard professors draw on decades of behavioral research and examples to explain the logic behind negotiation strategy.
- “Agile Software Development: A Gentle Introduction14,” Don Wells
A brief introduction to the agile process. While normally associated with software development, agile project management works well in any profession where people deal regularly with uncertainty.
- “Getting Real About Agile Design15,” Cennydd Bowles
Agile isn’t just for developers. This article on A List Apart explains why.
- Agile Estimating and Planning16, Mike Cohn
Cohn quite literally wrote the book on agile planning for software development.
- “Agile Budgeting: Cash Is King17” Jeff Magnusson
Agile billing’s bespectacled, mathlete cousin, agile budgeting, enables you to keep a rolling estimate of expenses for the next few months, instead of sticking to a monthly or yearly budget.
- “10 Contracts for Your Next Agile Software Project18,” Peter Stevens
An extended list of the different types of service agreements available. While this article presents them in the context of software, they apply equally to any service industry.
- “How I Went From $100-an-Hour Programming To $X0,000-a-Week Consulting19,” Patrick McKenzie
A good, if incomplete, guide to moving towards higher-paid consulting on a monthly retainer.
- 1 http://www.inc.com/guides/start_biz/24011.html
- 2 http://www.smashingmagazine.com/2012/08/27/designer-passive-income-experiments/
- 3 http://www.investopedia.com/terms/c/churning.asp
- 4 http://www.aiga.org/standard-agreement/
- 5 http://justtaptheglass.com/post/3311378627/logrolling
- 6 http://en.wikipedia.org/wiki/Don_Draper
- 7 http://scrummethodology.com/scrum-sprint/
- 8 http://www.agilemodeling.com/artifacts/userStory.htm
- 9 http://pivotaltracker.com/
- 10 http://theoatmeal.com/comics/design_hell
- 11 http://theoatmeal.com/comics/design_hell
- 12 http://www.abookapart.com/products/design-is-a-job
- 13 http://www.amazon.com/Negotiation-Genius-Obstacles-Brilliant-Bargaining/dp/0553384112
- 14 http://www.agile-process.org/
- 15 http://www.alistapart.com/articles/gettingrealaboutagiledesign/
- 16 http://www.mountaingoatsoftware.com/books/agile-estimating-and-planning
- 17 http://jeffmagnusson.com/2010/05/agile-budgeting-cash-is-king/
- 18 http://www.agilesoftwaredevelopment.com/blog/peterstev/10-agile-contracts
- 19 https://training.kalzumeus.com/newsletters/archive/consulting_1