Hourly, Not to Exceed versus Firm Price

[jike]

It is my thought that the Hourly, Not to Exceed figure should always be greater than a Firm Price Quote. A Firm Price would normally be competetive against other bidders but with an Hourly, Not to Exceed figure, you may be the only bidder (but not always).

Also the work for hourly, Not to Exceed may not be as well defined as Firm Price work. With Firm Price work, you may have more of a tendency to ask for extras whereas for Hourly, Not to Exceed often the expectation is "no extras".

Clients often want the same number for Not to Exceed and Firm Price which I do not believe is realistic for the reasons outlined above.

Does anyone else have any thoughts?

 

[dik]

I've usually used an upset price approximately 25% higher than the fixed price. I also use 'Extra Service Work Orders' to track additional work. The ESWO's include the reason, the authorization, the anticipated extra fee, and the additional time required.

Dik

 

[Taro]

Depending on how it is written up, the "Hourly, Not to Exceed" contract can be the worst possible type in my opinion.

If you work efficiently and are able to finish in less time than anticipated, then you are penalized with a lower fee instead of rewarded for turning over the project faster.

On the other hand, if there is more work than anticipated you can end up finishing the job for free.

There are two ways to handle it:

1. Inflate your rates to cover the shortfall of possibly finishing too early or too late. This seems to be in the "gray area" of ethical behavior to me though. If I did this, I would make it clear to the client that adjusted rates were being used because of the contract type.

2. Make sure the contract has clear limits on what the scope of work is and has provisions for payment of out-of-scope items. Sounds like your client doesn't like paying for "extras", so you need to make sure that both parties very clearly understand what the basic scope of services does and does not include. A minimum lump fee for a portion of the work where the scope is more clearly defined is also not an unreasonable request.

You could say, for example, that the scope of a base contract is to perform a structural evaluation of a building for a lump fee of $X. Following that, design of repairs will be billed hourly not to exceed $Y for up to 10 locations where deficiencies are found. Any additional repair design will be billed hourly upon written authorization from the client.

 

[csd72]

I have heard not to exceed described as "tails you win, heads I lose". Which can be accurate sometimes.

The answer is risk and reward relations. If you do a fixed price you run the risk of underquoting, but you also potentially have the reward of making additional profit.

With not to exceed there is no potential reward.

csd

 

[jike]

There are some large firms that have been very sucessful using the Hourly, Not to Exceed approach for all their projects as a partner with the client.

 

[lkjh345]

JMHO:

Hourly Not To Exceed contracts do have a place for some projects and in some instances.

The key, obviously, is setting your hourly fee at a rate that allows you (and/or your company) to earn an appropriate profit margin for the work involved and setting the total allowed billing high enough that your chances of exceeding it are low.

I know, these are 'keys' that are often time difficult to get from real clients on real projects. But in an ideal world....

We do some open ended hourly work for some clients on an 'on-call' set up. Our hourly rate for this work is higher than what we figure for our lump sum contracts to make up for the fact that we are giving up the chance to hit a 'home run' by getting a project done quicker than we estimated.

This arrangeemnt seems to fit the clients needs. And if it makes them happy, and we can make an appropraite profit in the process, we are happy to accomadate them.