Projects billed by the hour for the work performed are called “Time and Material” projects. This style of billing structure is where the cost of the work provided represents hours worked multiplied by the rate per hour of each resource. For example, if a consultant’s rate is $100 per hour and they work 160 hours in a given month, they will bill the client $16,000. This is the most common method of project revenue as it allows an accurate representation of cost at a lower risk. Companies that usually hire consultants have some form of a project budget that cannot be exceeded without being seen as a failure. This dollar amount usually relates to the “return on investment” (“ROI”) of the work, so it is in the firm’s best interest to be honest and precise about initial estimates when scoping out the work. It also dissuades frivolous and inefficient billing.
Fixed bid projects represent a set cost project. This style of billing structure provides the client with a higher level of security against costs overrun. The contract usually includes specific deliverables for a set cost. From the consulting firm’s perspective, it is in their best interest to staff this type of project to where the margin is similar to a time and materials project. If the project runs longer or burns at a higher rate, the margin decreases. If project finishes up sooner or requires fewer resource then the margin ends up being higher.
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