How to encourage clients to take delivery of professional services contracts...with one simple change!
Your consulting firm offers time and expense based contracts, but has cash flow problems caused by clients taking delivery slower than planned. This is not an uncommon scenario in IT project consulting, where customer priorities often conflict and increase or reduce the urgency of your project; particularly after the Statement of Work is signed by both parties. The second project I worked on at the start of my career suffered from this problem, and I remember my exasperation at why the client was putting off the start of our project. This issue is repeated across the industry, with customers signing the statement of work only to delay or cancel the kick-off of the project.
The typical solution to this challenge is to institute milestone-based billing or switch to fixed-price projects.
The catering and wedding industry offers a third, innovative alternative. Every year there are media stories of events where a wedding was cancelled but the couple donates the meal to charity. This is because it is a sunk cost, even though the contract was structured as time and materials.
Catering contracts are frequently structured as follows:
- 50% due at the time of signing
- 25% due a month (or more) before the event
- 25% due on the day of the event (or the day before)
This model can be applied to IT projects (or other professional services work) as:
- 50% due at the time of signing
- 25% due on the first day of the project
- 25% due on the last day of the project or upon acceptance
A manager or purchasing person is far less likely to sign a contract if they believe the work is unlikely to be delivered. Especially if they need to put up half the estimated cost of the project at the start. If they do sign, they are going to be motivated to complete the project, as they otherwise need to explain to their boss why they spent half the budget with no resulting work product. The consulting firm gains faster billings, reducing the outstanding backlog of dollars. Depending on your accounting policies and procedures, you may or may not be able to use those billings as revenue.
Your consulting firm must have adequate estimation in place to implement a change to incremental billing. By default, the final payment would be approximately 25% of the estimated cost of the project unless costs are higher or timelines are shorter. You can couple not-to-exceed language in contracts with this pricing model only if you have a high degree of confidence that your projects run at or slightly under estimations. However, if your firm under-estimates an hourly/daily contract by more than 25%, you are in the awkward situation of issuing a refund. Similarly, if your business commonly underestimates projects resulting in cost overruns, you either need to have excellent change management language built into the contract or risk hitting the not-to-exceed number without hitting the deliverables. That’s the worst case outcome in a fixed-price project.
The other potential tweak is to add period of performance language to the contract. Period of performance language defines a ‘use it or lose it’ expiry time on the services, typically six months or one year. This would further motivate clients to take delivery of the services defined in the contract. Not all organizations will agree to this language; for example, governmental customers may scope a project when they have the budget but have no plans to take delivery inside of the next five years.
These contractual changes will not prevent clients from delaying their projects when taken in isolation. However, when coupled with a communications plan and regular follow-ups to schedule the consulting project, these changes reduce the number of projects stuck in the backlog.