The Very High Cost of Low Flat Fees

The Very High Cost of Low Flat Fees

The concept of a flat fee is inherently attractive to both client and consultant. The client likes it because it can be budgeted and limits financial risk. The consultant likes it because it represents guaranteed cash flow. Yet in most instances, it's a truly bad idea for both parties. Here's why.

Let's begin with two true statements. First, a consultant's most valuable resource is the time for which he or she charges. Secondly, all projects consist of knowns and unknowns.

The two come together because all projects, but especially more complex ones, contain many unknowns, or as Teleconvergence calls them, gotchas. The full extent of gotchas are unknowable before a project starts -- indeed, many gotchas are created once underway, when a client becomes aware of a new risk or opportunity and asks us to investigate or to develop an idea further. These unanticipated efforts and new directions take time to work through, and time is, well, you know, money.

Any consultant proposing a flat rate has three choices, only two of which will generally be acknowledged. Since gotchas consume unknowable but frequently considerable amounts of time, the consultant generally has to either (1) ignore gotchas while bidding or (2) hide a significant amount of contingency time in the bid to account for them. This really isn't padding the bill; it simply reflects a desire to avoid losing money on the project when an unforeseeable snag (or even a series of them) raises its head.

Any prospective client receiving an surprisingly low time estimate should beware. Just as surgeons are frequently surprised by what they find while operating, it's equally true that no consultant can foresee everything. If there is no fudge factor for unknowns, and gotchas begin to consume the project, the consultant has every incentive to not spend time and effort elsewhere. Never assume a consultant will be willing to perform all the work necessary even though he or she stands to lose a significant amount of money, despite assurances to the contrary.

What about the third choice? The third choice is for a "consultant" to bid a low flat fee and to more than make up for it by receiving a hefty commission from one or more vendors in the consultant's stable while adamantly denying it's taking place.

Which of these approaches does Teleconvergence take?

None of them.

Except for retainers, we usually don’t perform projects on a totally flat rate; we will provide a flat rate for specific work with the proviso that time expended on anything not specifically included in the work description shall be billed separately.

In general, as we say elsewhere, we have a variety of plans and we always try to propose more than one of them to a prospective client in a way that is revenue neutral for us. That allows us to simply suggest that the client select the compensation method with which he or she feels most comfortable.