Working With Contractors Made Easy

Part 4 - Money and Payments

Payment is an often overlooked form of management, and can be strategized to enhance working relationships with contractors. Avoid the urge to use payment as a carrot-on-a-stick to try and get the most work out of your contractor. This typically results in ‘grudge-work’ from a contractor who will ultimately feel unappreciated and disrespected.

Instead, use payment as an opportunity to demonstrate trust and good will, by applying the following techniques:

1. Always pay slightly more than market rate. Be a good employer and it will come back to you ten-fold.

2. Always pay on time. Contractors have a tricky cash flow scenario, and probably need the cash more than you do.

3. Always pay a deposit or advance at the beginning of a project. This establishes trust and mutual appreciation, two vital ingredients for a successful working relationship.

4. Leave a reasonable amount of money in your budget for a completion bonus. If your contractors take good care of you, take good care of them. Show them that you’re serious about quality and professionalism and are willing to reward them for it.

5. Don’t attach money to multiple delivery milestones unless it’s absolutely necessary. Instead, make a simple payment plan where you provide a substantial deposit (40% or 50%) then another at launch (25%) and another after the work’s completed (25%). Keep the plan simple, and stick to it.

6. If your contractor asks for different terms, try to accommodate. After all, you are trading the money for service, and your flexibility will probably result in a better service.

The Danger of Fixed Bid

Fixed bid projects are the scourge of the Internet industry. It’s a well-known fact that most estimates prove to be highly inaccurate, and most Internet projects fail to come in on time, or within the original budget.

Internet projects are notoriously difficult to estimate, and most clients require a specific budget for the project. Amazingly, most small business managers will turn around and require a fixed bid from their contractors, thus incurring the very same risk to which they exposed their clients by accepting the fixed bid arrangement in the first place.

Think of it this way: if you offer your client a fixed bid, and something goes wrong, you have to incur the additional cost of correcting the problem. Thereby, you create a situation in which you are at your least motivated when you client needs you to be firing on all cylinders. Is that how you want your contractors to work for you?

The fact of the matter is that fixed bid jobs are always at risk of turning into the never ending project, complete with burnt out programmers and quickly diminishing client satisfaction. Just as you wish your client would pay you by the hour (even if it results in a lower total amount), your contractors wish you would extend the same courtesy.

Whenever possible, try to determine your potential profit margins and pay your contractors by the hour. This approach will result in increased quality, less fatigue, great satisfaction, and a more successful project overall.

How Can I Pay An Hourly Rate When My Client Has Me On A Fixed Bid?

If you’re on a fixed bid with a client, how can you possibly afford not to have your vendors on an hourly rate? It seems as if it would be exceedingly risky and unwise to do so. After all, if problems arise in the project, you’ll really need those contractors to come through for you. If they’re on a fixed bid and someone makes a mistake, they have to fix it for free, and they’re unlikely to maintain motivation. So, your client is ultimately at risk.

How can you make this work? The answer is simple:

Margin.

Margin makes a tough situation easy, and lets you sleep at night.

Let’s say I have a client who needs a ground-up Website with an online store and back-end integration. I consider myself to be experienced enough to create fairly accurate estimations, so I’ll break the project down into hourly blocks and resource allocations right at the beginning.

Never estimate value, only estimate time. There is no relevance to project value, as rates are arbitrary. The only useful information when projecting project costs are hours worked, which can be multiplied by the hourly rate once the estimations are complete.

So, the project might break down like this:

• Design... 24 hours
• HTML/Production... 60 hours
• Programming/Store... 50 hours
• Project Management... 40 hours

A total of 174 actual hours are projected.

At a rate of, say, $40 per hour for local contractors, the estimated value of the project would be $6960.

Now, I ask myself what the desired margin is on the project. Given the high potential for scope-creep and bloat on a typical Web project, I’ll want to at least triple the projected hourly requirement for a total cost of $20880. Most likely, I’d quadruple it, for a total value of $27,840.

Sound too high? Sure, there’s always someone’s nephew hanging around to take a project for $600. Then again, there are always clients hanging around who have already been burned by the ‘nephew job’ and are ready to pay real money for real work.

If the project is highly complex or the client is very difficult, I won’t hesitate to multiply the actual projected hours by 6 or even 8 before bidding on the job. As a rule, if you feel that there’s any chance that you might ‘get a haircut’ on a job, you’re selling yourself short. As a Web professional, you are expected to understand the risks of a project and price them accordingly.

If a project spins out of control and you lose money on it, you cannot blame the client, nor your contractors. We all know how this business goes and problems about, so be prepared for hiccups.