All Things oDesk
July 27, 2006 by Guest Blogger

oDesk is based on an hourly pay rate model rather than a fixed-bid project model. We have had a lot of debate about which model is better, both in the Community and in many conversations with our Buyers and Providers. Below are the results on the topic from our latest Provider survey:

Would you like to add a "fixed bid" or "minimum commitment" component to the oDesk hourly model?
Response Percent
No, I am happy with hourly pay + bonuses 52.7%
Yes, I would like to add minimum commitment from Buyers 12.4%
Yes, I would like to add fixed bid projects from Buyers 9.1%
Yes, I would like to add both minimum commitment from Buyers and fixed bid projects 22.5%
Other (please specify) 3.3%

Sitepoint Tribune has a good article in their newsletter about the dangers of fixed-bid internet projects, arguing that although clients may think fixed-bid is less risky, contractors should be on an hourly basis to align their incentive with the client's. The relevant portion of the newsletter is pasted below. You can read the entire newsletter here.

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Abid Mohsin


The Danger of Fixed Bid

Fixed bid projects are the scourge of the Internet industry. It’s well known 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 they exposed their clients to 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. You're creating a situation in which you're 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 is that fixed bid projects are always at risk of turning into the never ending project, complete with burnt out programmers and 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 them the same courtesy.

Whenever possible, try to determine your potential profit margins and pay your contractors by the hour. It 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 vendors on an hourly rate? It seems as if it would be exceedingly risky and unwise to do so. After all, if there is a problem in the project, you'll really need my contractors to come through for me. 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 do we 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.

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

So, the project might break down like this:

Design 24 hours
HTML/Production 60 hours
Programming/Store 50 hours
Project Mgmt 40 hours

A total of 174 actual hours are projected.

At a rate of, say, $40/hr for local contractors, the estimated value of the project would be $6,960.

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 at least to triple the projected hourly requirement, for a total cost of $20,880. 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 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 or your contractors. We all know how this business goes and the problems that can arise, so be prepared.