business advice | Aug 18, 2020 |
How should I set boundaries for flat-fee clients?

Dear Sean,

While the debate between charging a flat fee or billing hourly plus charging markup has been a well-worn subject for many years, with both having pros and cons, can you advise me on any language, thresholds, or boundary-setting measures if one does take on a client with a flat-fee arrangement? Through an initial call that lasted an hour and a half (far too long) and an initial follow-up project meeting, also an hour and a half (again, far too long), I can already tell that this client is a demanding, unstoppable time-stealer. I can also see that an hourly arrangement would be nothing shy of continual combat. We are in the service business, to be sure—so how best to capture profits and margins, and also control a client with boundary issues?

Money Talks

Dear Money Talks,

There’s no one-size-fits-all solution to boundary issues—after all, your proverbial time-stealer is another designer’s dream. The issue at hand is not whether or not you adjust your methodology to suit your potential client, but rather whether you go the other way and become even more outrageous in your own authenticity.

First, a quick recap on pricing and fees. The interior design business at the luxury level is a 45 to 55 percent gross-margin business. It just is. There are outliers (and if you’re earning less, check out this column on how to confidently raise your rates), but most designers wind up in that range. That means the only thing we are talking about is what, when and how you are going to get that margin.

The what, when and how are also what define your boundaries. In your case, you do not want your client to suck up so much initial time, which is a harbinger of much more time to come. You also clearly did not want to spend three hours on marketing in order to have the client engage your firm. That tells me that you are likely what I call a “presenter”—you love to present an idea, for the client to say yes—and then to stick to their agreement. In short, you do not want to spend any more time with your client than is necessary; you want effective decisions that you can rely on to move the process forward.

If the above assessment is accurate, you simply cannot charge by the hour other than for purely supervisory or consulting work. Charging by the hour, by definition, means that you want to spend more time with your clients (more time equals more money), which is the opposite of what you seek. So you are left with a flat fee.

To make the flat fee work for you, you will need to impose solid consequences for not meeting the requirements of the fee. For instance, if the fee is related to design, then what happens if the design is rejected? Will you quit? And if you go back and do the work again, how much will you charge? If the design is your first choice, it presumes everything you show afterwards is not; how far down are you willing to go in your selections? (Do you really want a project filled with your fifth choices?)

You are exactly right that flat fees require incredible boundaries—and no contractual term in the world will set that boundary for you (or mitigate project risk and systemic risk) as much as charging a fee if the client refuses to make an effective decision.

Let’s break it down: Project risk is the demand to complete the redesign faster and with more pressure than you otherwise would have—say you usually have six months to design, but only a month for the redesign. Systemic risk is introduced when you have to figure out how to complete that redesign in a month given your existing workload. What happens to your other clients, who have done everything right? They suffer because you are consumed by the time-stealer.

The way around both is to make sure you get paid for ineffective decisions or if the client introduces risk. A rule of thumb for me is “times three or done,” meaning that if you determine that the client is asking for a complete redo of design (versus a minor tweak), then the cost of that redesign would be three times your original fee. If you try to do that by the hour, you will never get there. The alternative would be for you and/or the client to stop the project.

As a corollary to where we began, the right client for you will completely understand and appreciate the necessity of making an effective decision—they would never need to pay the price for a redesign. This client would appreciate all that your firm would have at stake for not getting it right, and would not look to delay any possible decision that you might require. The client you describe on the other hand—not so much.

In past columns, I’ve used the phrase “horses for courses,” which means you want the right horse on the right course at the right time and the right circumstance to give it the best chance of success. The same principle applies to you, your employees, and most of all, your clients. Today, more than ever, give yourself permission to be outrageous in the way you earn your money. Respect comes from clear (and clearly communicated) consequences for a given behavior, not about acquiescence for the sake of an outlier.

Never say no—just yes on your terms only, please.

____________

How should I set boundaries for flat-fee clients?Sean Low is the the go-to business coach for interior designers. His clients have included Nate Berkus, Sawyer Berson, Vicente Wolf, Barry Dixon, Kevin Isbell and McGrath II. Low earned his law degree from the University of Pennsylvania, and as founder-president of The Business of Being Creative, he has long consulted for design businesses. In his Business Advice column for BOH, he answers designers’ most pressing questions. Have a dilemma? Send us an email—and don’t worry, we can keep your details anonymous.

Homepage photo: Shutterstock

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