I have worked on, sold and managed many projects in the corporate world as well as in the interiors world. It strikes me that the nature of ‘projects’ is very similar across all industries.Often how you propose to engage with the client to tackle the project will win you the business. Price and competence are obviously important. New clients might not trust you enough to feel they can commit to your services for the full duration of the project; so bear that in mind. Sometimes elements of risk in the project are high or unknown – you must deal with these in you proposal/pitch
(Nugget 1: By highlighting riskswhere others haven’t could win you the project on the risk issues alone).
Anyway, the point of this article is to summarise different approaches to charging for projects. You’ve probably heard of most of them but maybe not all:
1. The design fee
“I’m an interior designer and I provide a fantastic service. I charge you for my skills and you benefit from me being able to buy things for you at trade price, I don’t make a profit on the things I buy for you”.
This is a fair and honest pitch. Well done, I’d think about buying from you. It probably won’t differentiate you from anyone else though.
2. The markup
“I’m an interior designer and I provide a fantastic service, I’m going to do it for free for you though. I have to make a profit so I’ll make that on the difference between trade and retail prices for the things that I buy for you.”
I really don’t like this and yes I know it is widely used in the industry. Firstly your service is so good that you are giving it to me free? Really? Things that are given away free are generally valued very lowly in business. This approach might appeal to a cash strapped buyer though, so don’t dismiss out of hand. Secondly can I trust you to charge the fair and correct margin? Probably not (I don’t know you, how can I trust you?), you probably won’t have any degree of transparency on your purchases and their true retail and trade prices. Besides a savvy client can get many things at trade price anyway, buying is easy (ish) – selecting and creating is more the art, that is where the value lies.
3. Fixed Price
This is the best way to make money. Read on, I know you don’t believe me!
Many of the top consultancy companies in the world manage their fixed price projects very, very carefully and in great detail. They win the projects essentially because of their low price BUT that price is conditional upon lots of conditions. Once those conditions cannot be met by the client then the price goes up (a lot). After committing to a company the client finds it very hard to pull out later and change suppliers. In any case they share the blame for not properly specifying the project at the outset, so in itself that really is not a reason to think of ditching the new supplier.
(Nugget 2:) For this to make money, lots of money, you have to really understand what you have to deliver, in detail. You have to know all the risks and where things can go wrong and how you will handle those eventualities. You have to be clear about what is and what is not included. (Of course add-ons for what was not originally included will cost a LOT, later on when the client changes their mind!)
This relies on you being organised and the client less so. In the corporate world many buyers are themselves now very organised and so this approach to projects is consequently becoming less profitable. These projects often become acrimonious unless one side gives in over points of contention that arise “I thought XXX was included” – you’ve been there.
Remember that when you are extracting every ounce of $/£ out of your client, at least be nice and polite and friendly about it. Seriously.
Of course if you’re new to the industry you might just go for this approach to win the business and you MIGHT just strike it lucky based on little or no detailed preparation. Or you might not.
4. Phased Approach
This works best where there are unknowns that the client appreciates exist, it’s a good and fair way of making money.
You identify the phases of the project: scope, functional design, technical design, aesthetic design, etc – whatever you choose to call them are unimportant.You come to a financial arrangement for each phase before it happens. When the first phase finishes you definitively quote for the subsequent one. You might have earlier given an indication on the cost of all phases but you make it clear up front that you have a chance to revise prices as some of the risks become more clear.
The great things about this approach are inertia, deliverables and risk.
‘Inertia’ because clients are unwilling to change suppliers unless really annoyed – in which case it’s probably a good time to move on as you’ve messed up and lost their trust.
‘Risk’ because you MUST plan for all risks in this approach. Your prices include the risks, you say you are charging a lot for phase H because of risks X, Y and Z.
‘Deliverables’ because when you revise (typically up) the cost of a subsequent phase it’s because the deliverables have been changed by the client (no matter how small the change).
Oh and of course its easier for the client to commit to small sums of money rather than the whole thing.
Here’s one you probably haven’t considered.
Sometimes you just know that a client is fishing for ideas for their project. You just know they are going to do it themselves. (Nugget 3:) Well if you know that then why not tailor your proposition around that fact? “Look Mr X, here are the 8 phases of an interior design project, you can probably do much of them yourself but you are not experienced. I am. Let me work with you on a half-daily basis to help you along in the various stages. If there’s one bit you are not happy with like instructing builders or architects I can do that bit for you”
“I really like this approach,” says client A. “I’m not a designer but one day might like to be, it can’t be that hard and yes I know I don’t yet have all the skills, so having someone to help me along would help.”
Of course many clients will find their project too time consuming or their skills lacking. That’s fine though because they have already committed to you when they realise that and so you will be there to take over and finish it. At a price of course!
The secret of this one is to snare the project that others have no chance of winning because of their approach.
6. Selective Phase Bidding
I don’t like this one.
You essentially bid for just the phases that you are expert at. Essentially if you do this you will rarely win.
Many clients do not want to deal with many suppliers, they want one monthly invoice.
Yet you might not feel comfortable to handle all aspects. The solution is partnership with another supplier. Partnerships are fraught with danger but can sometimes work out well. (Nugget 4:) Make sure you work with someone you trust and make sure they know that partnership involves reciprocation ie they have to get you involved in their next project.
7. Capped Price
“I will charge you based on my time and the cost of the materials. However you have a budget so I promise I will not exceed it.” Crazy, don’t get involved in this type of project unless you are desperate. How do you benefit when you are taking on all the risk, this could lose you thousands.
8. Floor Price
This sounds more like it! A minimum price! However you have to sweeten this with discounted rates above the floor price so the client understands that if the floor is exceeded then you are making much less than you normally do and that you will strive to avoid that situation happening as you want to only do profitable work.
This one can work well, get your numbers worked out before you start.
9. Time Boxing
This is a great approach for the creative bits of a project, less so for converting your designs to their built and installed reality where potentially huge sums are involved.
You accept a fixed time limit and a fixed budget to deliver, say, anything from a colour scheme or a concept apartment. You identify all phases of a project where such an approach is sensible. The great thing is that deadlines are met and budgets are adhered to for your client. Your client might not get quite as much as they really wanted or you might have had to throw more resources at the project than you would have liked but in either case the loss will probably not be that great in the grand scheme of things. This works well if you have a genuinely trusting relationship with the buyer.
Make sure that you combine this with a LIMITED list of ‘must haves’ for the time box you are working on. This must have list places a risk on you, but in this sceanrio I think that is fair.
It’s also quite an innovative way of managing projects and so is a good differentiator for you when you are pitching for work. It gives you an aura of managerial competence to even know about such an approach (maybe!).
10. Risk Sharing
You identify the risks in a project and if the risk materializes you agree to share the risk burden over and above the costs already agreed. I don’t really like this approach. Try to avoid it by arguing for a separate piece of work to assess the risk in detail so it can be properly bid for. The real problem with the approach is that you will get a financial hit for something that you have little knowledge or control over. Probably not too fair on you but acceptable if the risks are small as a goodwill gesture perhaps.
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