For more than a decade, we’ve consulted with countless small agencies to help them validate their fixed pricing models. The primary question they are asking is, “how much profit, if any, are we making on our fixed price contracts?” To answer that question, we help them configure and deploy time tracking software, integrating it as seamlessly as possible into their day-to-day workflow. The agencies we work with typically use one of two different fixed price models.
The first model is project-based, where they charge a lump sum for the entire project. This is useful for agencies that work primarily on one-off projects, such as marketing campaigns, building plans, or web site designs. In this use case each deliverable is unique to the client, so pricing is based more on market value than billable hours.
The second model is time-based, where they charge a monthly subscription amount. This model is ideal for agencies that do repeat work, such as maintaining web sites, writing articles, or doing social media outreach. In this use case the agency receives a monthly payment for the duration of their working relationship with the client.
Regardless of which model they use, agencies are selling the same thing — their time. Time is a limited resource bound by the number of people on your team and the hours they can work. Finding out where your time is going is a must in deducing whether or not you’re actually profitable. That’s why we recommend using time tracking to validate your fixed pricing model. Here’s how:
The first step is to estimate how much time you think the project will require. If you are currently billing clients using a fixed price model, you are already doing some form of estimating. However, there are a few things you can do to improve your estimate.
First, factor in other variables, such as rent, utilities, and payroll taxes. Then, pad your estimate to account for the likelihood that your original estimate was too optimistic. You may also want to increase your estimate if the market value of your work is higher than your final estimate.
As soon as the project kicks off, your goal is to track every hour spent working on it. Good time tracking software will feature timers and reminders that make this process less painful. We’ll be the first to admit that time tracking is not fun. However, the benefits make it well worth building a culture of time tracking.
Check in on the project weekly to see how well your team is doing. Some may need encouragement or direction in getting their hours entered. The important thing is to acknowledge the learning curve and work together as a team. The primary objective with this step is to capture as much time as possible. You’re collecting data that you will analyze later.
The final step is to learn from your data. However, you don’t have to wait until the project is over to start analyzing your time. We recommend running reports early and often. Time tracking reports will reveal potential problems that could derail a project, enabling you to correct them and keep the project on course.
When the project is complete, you’ll have amassed a trove of time tracking data, and a clear picture of how much time and effort was put into it. You’ll be able to run reports and reveal whether or not the project was profitable. Then, you can take a deeper dive into your data and learn why the project was a success, or a disappointment.
The end game is to continuously apply what you’ve learned to your next project, and the one after that, and so on. When you repeat this process, your estimates will become more accurate, and your profitability will increase.