How I Structure Contracts for Annoying Consulting Clients with Never-Ending Changes in Work
Spoiler alert: You can protect your time, commercial interest, and energy with the proper client contract structure.
I know what you are going to tell me.
Your consulting clients do not know what they want. As a result, they keep changing their consulting project mandates.
And therefore, they keep revising the scope of work. You are frustrated and annoyed because what you delivered last evening amounts to nothing.
And this is the 3rd time you are starting from 0.
You start losing hope in your 1-Man consulting practice. You wonder if you will ever complete this consulting project and be profitable.
I am here to tell you that YES YOU CAN.
To Do So, We Start with Accepting the Nature of Consulting Work.
Our future is filled with uncertainty. We are besieged by supply chain disruptions, raging inflation, and slow economic growth.
I remind you that we did not see this coming 12 months back.
The nature of the consulting industry (regardless of niche or domain) is similar to our perception of the future. The only form of certainty is uncertainty.
And that manifests itself in the following ways.
- Clients who think that they know what they need don’t actually know what they need
- Clients who believe $X is sufficient at the beginning are shocked by the final bill
- Clients who assume that consultants can take away all their problems
Sounds familiar? You bet.
My professional experience as a 1-Man consultant on the side tells me one thing. We may (by mistake or lack of exposure) sign up clients with no clear idea of what they want.
There is a high chance we realize it too late.
But all is not lost.
We can manage the risk of such consulting projects via our contract structure.
Between Fixed Price and Variable Pricing Lies a Goldilocks Zone of Neutrality
Taking on clients with unclear expectations of the consulting assignments requires me to manage my financial risk.
After all, I want my 1-Man consulting practice to be profitable. To do so, we must learn to work within the Goldilocks zone. Investopedia explains this concept well.
A Goldilocks economy is not too hot or too cold but just right — to steal a line from the popular children’s story Goldilocks and the Three Bears. The term describes an ideal state… warm enough with steady economic growth to prevent a recession; however, growth is not so hot as to push it into an inflationary status.
Goldilocks zone = Sweet spot
This is how sweet spots can be found in the consulting line of work.
- First, understand that clients want you to do more while paying you a fixed fee
- Next, understand that consultants want to be paid based on the effort committed
- Therefore, the sweet spot is a combination of fixed + variable compensation
Fixed + variable compensation structure is frequently mentioned during commercial discussions with consulting clients.
‘Time & Material’ is the Morse Code for Time Denominated Variable Pricing
This is a common approach used by professional services firms in audit, tax planning, and technology services.
Time & Material (T&M) contract structure refers to the following.
- The consultant charges you for the time spent to get work done
- The consultant bills you for all materials purchased necessary for getting work done
In short, this contractual arrangement allows you to float your charges to the client to complete a consulting assignment. This is not an open bar concept, by the way.
Clients must agree, upfront, that the T&M expenses are necessary for the work-at-hand. Justifications are required.
I will leave that discussion point aside for now. Let me explain how I apply the T&M structure in my current consulting deals.
This is what I do.
- I start with a based fee
- Then, I pile on a variable component on top
- The percentage allocation of fixed and variable depends on client maturity
- Low maturity clients get a higher variable component
- High maturity clients get a higher fixed component
I get questions on the variable pricing component all the time. I get it. Clients do not like to burst their budget.
And so, I explain to them the following.
- The fixed cost component takes care of the initial bucket of consulting hours purchased
- That is a rough estimate as we need to get down to the details of needs and wants
- If the actual hours consumed spill over from the initial purchase, the T&M component kicks in
- It occurs when there is rework or new work requests
Consulting clients appreciate what I say. Of course, they will refrain from getting me to do more work than I should.
They know I will charge them.
I maintain a Google Sheet (shared with my consulting clients) on the hours spent on their projects. They can see the time expense in real-time. Extra hours are billed accordingly.
I create a different tab for material expenses. Screenshots of receipts and actual goods purchased will be sent to clients for their purview and reimbursement.
Parting Keynote
In the consulting industry, clients are everything.
The trouble is… there are literally all sorts of clients. I hate clients who do not respect my time. The same goes for those who believe I will be at their doorstep after contacting me.
No can do.
I am not here to be exploited. 1-Man consultants are not meant to be a rat in the maze.
We can protect ourselves. Our consulting contracts are a good starting point.
And you want to make accurate assessments of different client profiles. Variable pricing models work well for clients with unclear expectations and vague requirements.
The onus is on us to protect profit margins as 1-Man consultants running our own practice.
As a content contributor, I write my observations from daily life and my business exposure. Because our life experience is the bedrock of our unique perspectives.
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