The two most common ways to price interactive work are Fixed Price and Time & Materials. Each method has its pros and cons that greatly affect the buyer and seller of the services.

Fixed Price

Fixed Price is popular with ad agencies and communications firms doing interactive work. It’s how they have traditionally priced their services and is client friendly, because with Fixed Price the risk to produce the job, at the quoted price, lies with the seller. When pricing a project this way it is imperative that the project’s requirements are determined and the scope is tightly controlled. Any complications, rework, or excessive man-hours because of underestimating required time, unseen issues, or inexperience are the cost of the seller. The only time the price is usually renegotiated is when the requirements change, or the buyer requests a change of scope.

When calculating a Fixed Price estimate is it important to figure in contingencies for the unknowns and potential problems, in addition to a profit margin. Counting just man-hours usually means an unprofitable situation. There are several ways to include these cushions: applying a multiplier, padding hours, and adding a risk contingency cost based on project requirements are a few.

Time & Materials

Because of the difficulty of gathering requirements and establishing a detailed project scope, Time & Materials is how most IT companies price their services. This method puts the risk on the buyer to get the project completed within their budget and can be unfavorable in competitive environments, or unacceptable in RFPs. An estimate with a price range is usually proffered with the proposal/contract. Initial estimates can range in excess of +/- 25%. Most buyers like the price to be accurately estimated, but this arrangement is more flexible than Fixed Price. Additional estimates are often given as requirements become available, or as work is completed. Any changes are simply billed when they are incurred.

Do not mix the two methods. Real problems arise when a solid price is quoted in a proposal/contract that has been calculated using Time & Materials formulas. Even if you plan to bill using Time & Material costs, it rarely adds up and the initial price quote is all the buyer cares about.

Each method is effective when used appropriately. Rather than always pricing work the same way, let the market and project dictate which method is best.