August 19, 2018
BESTOF Can you value price if you pay your subcontractors hourly?
FYI - I’m currently off-grid at a lodge on a lake in a remote corner of Maine. I’ll be back in the saddle on Monday, August 20th. In the meantime, here’s a greatest hits post from the last year:
Can you value price if you pay your subcontractors hourly?
Sent by Jonathan Stark on August 15th, 2017
Reader Mary Shaw wrote in to ask (shared with permission, edited slightly for length)
Hey Jonathan, I usually do upfront UX for teams and then hand off approved wireframes for development. I have an opportunity to value price my services for an upcoming project, but then partner with a developer who charges hourly. How could I package this? Value price their piece as well? Thanks for any advice you can pass along! —Mary
Thanks for sharing, Mary!
I love this question because it gets into the tough reality of actually implementing value pricing in the real world.
Here are my thoughts on the subject:
The situation Mary is in is pretty common (i.e. you do a preliminary design phase of some kind, after which an implementation needs to be done by someone other than you). I’ve seen it handled many ways:
- You introduce the client to someone who can do the implementation for them and they deal with each other directly
- You get paid on a monthly basis to advise the client’s internal team as they work through the implementation
- You hire a subcontractor to do the implementation and roll the cost into a value priced quote
- You hire a subcontractor to do the implementation, mark up the cost, and pass it on to the client
I only do #1 and #2 in my business. I have students who do very well with both #3 and #4. They all work. I think it’s mostly a matter of personal taste which one is the right choice for you.
It sounds like Mary is considering #3 which - as she noticed - is tricky if the sub bills hourly. If #3 also sounds like the obvious option to you, here are a few things to consider:
If the scope creeps, the hourly costs are going to eat into your profits. If things get really bad, the scope creep can eat all your profits (or more - yikes!). If you’re barely breaking even or losing money, it will jeopardize the success of the project, and erode your relationship with both the client and the subcontractor.
Yuck.
If you’re going to proceed, you need to make a risk assessment based on your experience with this sort of thing, your relationships with both the client and the sub, and the clarity of the vision for the project.
I’ll elaborate by describing the bounding scenarios...
LOW RISK—If you’ve done projects like this a million times, you have a trusting relationship with the client, you have worked with the sub many times in the past, and the desired outcome of the work is clearly defined, well understood, and agreed to by all parties, then the risk to you is pretty low.
HIGH RISK—On the other hand, if you haven’t managed this sort of project before, you haven’t yet built up a lot of trust with the client, you’ve never worked with the sub before, and the desired outcome of the project is hazy or in dispute, the risk to you is pretty high.
When it comes to pricing either of these scenarios, you want to estimate the value of the outcome to the client, then price your services at a fraction of that number.
Next, estimate your likely costs (i.e. time, money, stress) for doing the work. Finally, subtract your costs from the price to estimate your margin.
If there’s little margin and the risk is high, you shouldn’t submit a quote.
If the there’s a lot of margin and the risk is low, you should submit a quote.
If margin and risk are somewhere in the middle, then whether or not to submit a quote is a judgement call on your part. You would make the decision based on:
- Your current capacity utilization (are you booked solid or not?)
- How badly you need the money (are you broke or not?)
- How much you want to help the client (do you believe in what they’re trying to do or not?)
I apologize for the complexity of this answer, but the question really cuts the core of the risk/reward model that value pricing enables. I can spout theory from the ivory tower all day long, but ignoring the situational complexities doesn’t help anyone.
Yours,
—J