I have worked on, sold, and managed many projects in corporate and interior environments. It strikes me that the nature of ‘projects’ is very similar across all industries.
How you propose to engage with the client to tackle the project will win you the business. Price and competence are essential.
New clients might not trust you enough to commit to your services for the entire project, so keep that in mind.
Sometimes, risk elements in the project are high or unknown – you must deal with these in your proposal/pitch.
(Nugget 1: Highlighting risks where others haven’t could win you the project on the risk issues alone).
Anyway, this article summarises 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 profit from the things I buy for you”.
This is a fair and honest pitch. Well done; I’d consider 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 I buy for you.”
I don’t like this, but I know it is widely used in the industry. Firstly, your service is so good that you are giving it to me for free? Really? Things given away for free are generally valued very lowly in business. However, this approach might appeal to a cash-strapped buyer, so don’t dismiss it.
Second, can I trust you to charge a fair, correct margin? Probably not (I don’t know you; how can I trust you?). You probably won’t have any transparency into your purchases and their actual 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, and where the value lies.
This is the best way to make money. Read on, I know you don’t believe me!
Many of the world’s top consulting companies manage their fixed-price projects carefully and in great detail. They win projects largely because of their low price, which depends on many conditions. Once the client cannot meet those conditions, the price increases (a lot). After committing to a company, the client finds it difficult to withdraw later and switch suppliers. In any case, they share the blame for specifying the project incorrectly at the outset, so that isn’t a reason to ditch the new supplier.
(Nugget 2:) To make lots of money, you must understand in detail what you must deliver. You have to know all the risks, where things can go wrong, and how you will handle those eventualities. You have to be clear about what is and isn’t included. (Of course, add-ons for what was not included initially will cost a LOT later when the client changes their mind!)
This relies on you being organised and the client being less organised. In the corporate world, many buyers are now very organised, so this approach to projects is 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: when you’re extracting every ounce of $/£ from your client, at least be nice, polite, and friendly about it. Seriously.
Of course, if you’re new to the industry, you might use this approach to win the business, and you MIGHT strike it lucky with little or no detailed preparation. Or you might not.
4. Phased Approach
This works best when the client appreciates the unknowns; it’s a fair way to make money.
You identify the project phases: scope, functional design, technical design, aesthetic design, etc.; whatever you call them is unimportant. You come to a financial arrangement for each phase before it happens. When the first phase finishes, you quote the next one accurately. You might have indicated the cost of all phases earlier, but you should clarify upfront that you can revise prices as risks become more apparent. The great things about this approach are inertia, deliverables and risk.
‘Inertia’ comes from clients’ unwillingness to change suppliers unless they are annoyed. In this case, it’s probably time to move on, since you’ve messed up and lost their trust.
‘Risk’ because you MUST plan for all risks in this approach. Your prices include the risks, and you say you are charging a lot for phase H because of risks X, Y and Z.
‘Deliverables’ are used when you revise (typically up) the cost of a subsequent phase because the client has changed the deliverables (no matter how small the change).
Oh, and of course, it’s easier for the client to commit to small sums than the whole thing.
5. Mentoring
Here’s one you probably haven’t considered.
Sometimes, you know that a client is fishing for ideas for their project. You know they are going to do it themselves. (Nugget 3:) If you know that, why not tailor your proposition to 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 half-daily to help you 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 like this approach,” says client A. “I’m not a designer, but one day I 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 projects too time-consuming or their skills lacking. That’s fine, though, because they will already commit to you when they realise that, so you will be there to take over and finish it. At a price, of course!
The secret here is to snare projects others can’t win because of their approach.
6. Selective Phase Bidding
I don’t like this one.
You essentially bid only on the phases you are an expert in. Essentially, if you do this, you will rarely win.
Many clients do not want to deal with multiple suppliers and prefer a single monthly invoice.
Yet you may not feel comfortable handling every aspect. The solution is a partnership with another supplier. Partnerships are risky but can work out well. (Nugget 4:) Make sure you work with someone you trust, and that they know the partnership involves reciprocation, i.e., they have to involve you in their next project.
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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 taking on all the risk? This could cost you thousands. It could bankrupt you.
8. Floor Price
This sounds more like it! A minimum price! However, it would help to sweeten this with discounted rates above the floor price. So the client understands that if the floor is exceeded, you will make much less than usual and will strive to avoid that situation, since you only want to do the profitable part of the job.
This one can work well; work out your numbers before you start.
9. Time Boxing
This is an excellent approach for the creative bits of a project, but less so for converting your designs into their built-and-installed reality, where potentially huge sums are involved.
You accept a fixed time limit and budget to deliver anything from a colour scheme to a concept apartment. You identify all project phases where this approach makes sense. 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 wanted, or you might have to throw more resources at the project than you’d like, 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 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 scenario, I think that is fair.
It’s also an innovative way to manage projects, so it can be a strong differentiator when pitching for work. It gives you an aura of managerial competence just for knowing about such an approach (maybe!).
10. Risk Sharing
You identify project risks, and if one materialises, you agree to share the risk burden beyond the costs already agreed. I wouldn’t say I like this approach. Avoid it by arguing for a separate piece of work to assess the risk in detail so it can be adequately bid for. The real problem is that you will take a financial hit for something you know little about or can’t control. It’s probably unfair to you, but it is acceptable if the risks are small as a goodwill gesture.
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