Month: October 2025

don’t like to think about the amount of money i’ve lost on projects. Let me go back, it’s not exactly true. I haven’t lost money so much as eroded margin.

That’s the thing with pricing. So long as there is a gap between your internal hourly rate target and your hourly cost, you will always have a margin of error in your projects wherein they’re still profitable, but simply not as profitable.

I wrote last week about why I believe flat rate projects are better, and this is one of the many reasons that it’s doable.

I never expect to earn much, if any, money on the first round of any type of project. When my firm executed our first on-prem to cloud domain migration project, we definitely reduced our margin down to nothing. After talking to our PM I realized that it was based on the fact that we hadn’t calculated the cost of migrating user’s workstations. We went back and ran an analysis of the time on that and reworked the scope for future project to include an extra hour per user in subsequent projects.

The next one, we lost a little less, and we found ways to be more efficient so we didn’t have to adjust the quote or the scope. By the third project we were hitting right around our target.

Was each subsequent project perfect?
No.
Did we get close to our target within an acceptable range of 5% up or down?
Yes.

There is no reason that you should be able to produce a consistent deliverable on something you execute often. You should be able to have a well scoped profitable project after working towards the same deliverable 3 times.

Thoughts? PM’s out there, am I on or off with this assessment?

Let’s talk about an hourly rate on work and why I don’t like to talk about it. 🙂

Well, the issue is not that I don’t like to talk about it. The issue is that it’s a red flag for a client’s posture towards the value of services.

First let’s talk about the pros of T&M:
1) Risk Reduction -> Your risk is greatly reduced as the provider since you’re paid for your hours.
2) Cost Sensitivity -> Client saves money since they pay for the exact amount of time the job takes.
3) Financial Flexibility -> When the scope is unclear this allows for the flexibility needed to adjust based on the needs required to attain the desired deliverable.

The problem with those pros is that they aren’t the value add they look like on the surface and most of the resistance to the issues that T&M mitigates against can be easily overcome.
1) Risk Reduction -> Risk should be mitigated by the nature of clear scopes. If something goes beyond the scope there is a change order for the unknown issues. Putting more risk on the client for a deliverable that the provider is responsible for will simultaneously tie the provider’s hands.
2) Cost Sensitivity -> There’s nothing about billing by the hour that will reduce this dynamic and I’ve never seen a T&M guestimation produce a situation where the hours did not increase past an original guestimation of the work. If you are able to bid that accurately so that you don’t have to go back and ask for more hours, then it really makes sense to introduce a flat rate.
The best answer to cost sensitivity is tell someone “Here’s the deliverable that you want, here’s the cost to get there based on these assumptions. If those assumptions don’t change, then it will not cost you another penny past this number.”
3) Financial Flexibility -> This is not a distinct value add between flat rate and T&M. Flat rate does not mean turnkey and you can include an assumption of scope that the client will take to add flexibility. Every time I’ve seen this in the wild it’s produced is a continual negotiation with a client where they feel they’re being nickeled and dimed because each moment you hit your guessed hours you’ll need to go back to the client and ask for more. While there’s nothing about a flat rate quote that reduces the need for discussion the moment the assumptions the quote is based on change, it definitely reduces the need for disucssion down from a potential many to a single.

I’m interested in pushback for this. Has anyone founf that using T&M as a standard method did not produce the problems i’ve listed above? How did that work for you?

Every business and function has a few levers that make a difference on the business. In terms of make the operations run better, everything else that doesn’t lead to the moving of these is a distraction. Let’s talk about this in the context of Project based work. Time is a huge lever.

There are two options:
-Time and Material
-Flat Rate

Projects are an interesting function for a business that is primarily MRR based revenue. They’re the one part where the model setup is that the more work you do the more money you make. That reality sets you up for failure from the start. Unless you can gain some efficiencies. How do you do that?

Flat rate deliverable based projects. e.g. We’ll have this result delivered to your business by this date regardless of how much time it takes. The value is the deliverable, not the hours worked.

The other option is Time and Material basis. I do not like these. There are unique circumstances where they make sense. Your margins are capped to whatever the difference is between your hourly rate and the hourly cost of your project team. The issue is that there is no incentive of efficiency for your project managers or team on these.

Is there risk with flat rate? Sure. The entire thing is a risk/reward discussion and you need to price it accordingly. You might even lose a little margin on the first project (flat rate allows you to build in a margin buffer so you can mitigate against the risk of losing money entirely). There’s no reason that a good project manager, after running 2-3 projects with the same defined scope, shouldn’t be able to increase the margin of this type of setup significantly.

More to be said on this. I’ll post more late this week. Are you a business owner or a project manager? Which finance structure do you prefer and why?